The Professionals’ Academy of Commerce

Pakistan’s Leading Accountancy Institute

Certified Finance and Accounting Professional Stage Mock Examinations

23rd May 2022
3 hours – 100 marks
Additional reading time - 15 minutes

Advanced Accounting & Financial Reporting

Q.1 (a) On 1st June 2019 Mazda Limited (ML) ,granted to each of its senior management team either 130,000
shares in ML or a cash equivalent equal to the market price of 120,000 shares. The right is conditional on
the managers remaining in employment at ML until 31st May 2021.
ML reserves the right to choose whether to settle the scheme in cash or shares. However, in the past, ML
has always opted to settle similar schemes in cash. If the shares are issued, they must be held for 2 years
from 31st May 2021 before being sold.
ML share price was Rs. 1,700 on the 1st June 2019 and Rs. 1,800 on 31st May 2020. It rose to Rs. 1,850
on 20th June 2020, the date the financial statements were authorised for issue. The fair value of the shares
alternative was calculated at Rs. 1,620 Rs. 1,720 and Rs. 1,770 at the same dates respectively.
At 1st June 2019, there were 60 members of the senior management team and at grant date no member of
the team was expected to leave during the vesting period. However 4 managers left in May 2020 and as at
31 May 2020, a further 6 managers were expected to leave within a few months of the year end.
Required:
Explain the appropriate accounting treatment of the above transaction for the year ended 31 st May 2020 in
the books of ML. (08)
(b) On 1st October 2018 Suzuki Limited (SL) granted share options to 200 senior executives. The options will
vest on 30th September 2021 subject to the following conditions:
(i) Each executive will be entitled to 1,000 options if the cumulative profit in the three year period from
1st October 2018 to 30th September 2021 exceeds Rs.30 million. If the cumulative profit for this
period is between Rs.35 million and Rs. 40 million, then 1,500 options will vest. If the cumulative
profit for the period exceeds Rs. 40 million, then 2,000 options will vest.
(ii) If an executive leaves during the three year vesting period, then that executive would forfeit any
rights to share options.
(iii) Notwithstanding the above, no options will vest unless the share price at 30 th September 2021
exceeds Rs. 5.
Details of the fair values of the shares and share options at relevant dates are as follows:
Date Fair Value Per
Share Option
Rs. Rs.
st
1 October 2018 4.0 0.50
30th September 2019 4.40 0.60
30th September 2020 4.60 0.75
The estimate of the cumulative profit for the three-year period ending 30 September 2021 was revised
each year as follows:
Date Expected profit for the three-year period
Rs in million
1st October 2018 32
th
30 September 2019 39
30th September 2020 45
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On 1st October 2018, none of the relevant executives were expected to leave in the three year period from
1st October 2018 to 30th September 2021 and none left in the year ended 30th September 2019. However,
10 executives left unexpectedly on 30th June 2020. None of the other executives are expected to leave
before 30th September 2021.
SL correctly reflected this arrangement in its financial statements for the year ended 30th September 2019.
Required:
Discuss how the arrangement with senior executives must be accounted for in the books of SL and
Prepare Extracts of Statement of financial position as at 30th September 2020. (08)

Q.2 (a) Cherry Builders Limited (CBL) is a public unlisted company and engaged in development of housing
schemes. They are planning to launch a huge housing scheme in Gawadar. This scheme requires heavy
investments. Since CBL is unlisted, it is planning to finance the proposed project by bank financing. A
consortium of banks has shown interest in financing the project. Ahmed, a chartered accountant, who is
director finance of CBL is the lead negotiator with banks. Khubaib, an ACA, has recently joined CBL as
Manager planning and budgeting.
CBL is not making high profits for some time and Ahmed has been manipulating accounts to hide bad
performance as much as possible. Future survival of CBL is highly dependent on bank financing for new
project. For this purpose, Ahmed has told Khubaib to prepare a feasibility of project showing fabricated
handsome profits and cash flow position as he believes that only a highly profitable and cash rich project
would attract bankers. Ahmed also informed Khubaib that success of project financing would be a key
performance indicator for his job stability.
Required:
Briefly explain how Ahmed may be in breach of the fundamental principles of ICAP’s code of ethics.
Also state the potential threats that Khubaib may face under the circumstances, along with available
safeguards (if any). (07)
(b) Relevant balances of Volvo General Insurance Limited for the year ended 30 June 2021 are given below.
Opening Closing
‘Rupees in ‘000’
Outstanding claims 43,200 46,800
Prepaid reinsurance premium 31,500 32,400
Unearned premium reserve 66,600 64,800
Following information is available for Volvo General Insurance Limited for the year ended 30 June 2021.
Rs. in ‘000
Claims paid 54,900
Finance cost 4,050
Income tax expense 6,750
Investment income 17,100
Management expenses 23,400
Net commission and other acquisition expenses 11,700
Other expenses 5,400
Other income 810
Reinsurance premium ceded 27,000
Reinsurance and other recoveries revenue 36,000
Rental income 8,550
Share of profit from associate 1,890
Gain on investments -OCI 5,220
Written gross premium 117,000
Required:
Prepare statement of comprehensive income of Volvo General Insurance Limited for the year ended 30
June 2021 alongwith relevant notes. (09)
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Q.3 (a) On 1 November 2021, Elantra Limited (EL) entered into a contract with Peugeot Limited (PL) to
manufacture and sell 100 units of a specialized machine at a total consideration of Rs. 300 million. The
machines will be delivered in lots of 20 units at the end of each quarter. PL has paid 10% non-refundable
consideration in advance while the remaining consideration will be paid in five equal instalments, only
after delivery of each lot and not before.
The sales team of EL worked hard and spent 1600 hours costing Rs. 4 million for preparing proposal for
the contract. The team was also rewarded with a bonus of Rs. 6 million upon obtaining the contract.
Upto year ended 31 December 2021, EL had manufactured 15 units of the machine to be delivered on 31
January 2022.
EL’s CFO, a chartered accountant, has suggested that revenue for 15 units should be recognized in 2021
as the machines are of specialized nature and have no alternate use for EL. Further, the sales team cost
of Rs. 10 million should be taken to statement of profit or loss in 2021 as this has been fully recovered
through 10% advance received from PL.
Required:
Analyse the treatments suggested by the CFO in respect of the above contract. (06)
(b) Zotye Limited (ZL) , a hotel based in Pakistan had the following transactions during the year:
(i) On 31st March 2021, ZL signed a contract to supply 50,000 units of food packs at an agreed price of
Rs. 100 per unit. On the same day, 30,000 units were delivered, with the remainder delivered on 1st
June 2021. It was agreed that the customer would have extended credit terms of 12 months from the
date of delivery. ZL’s cost of capital is 10%.
(ii) During the year ended 31st March 2021, ZL received payment in advance for the supply of 2,000
hotel room-nights to customers at Rs. 1,000 per room per night. Only 400 of these had been
occupied by 31st March 2021. Customers are entitled to occupying the remaining 1000 room-nights
within the next six months. The amounts paid by the customers are non-refundable unless the
company fails to provide the agreed accommodation.
Required:
In each of the scenarios above, calculate the amount of revenue to be by ZL for year ended 31st March
2021, and explain the appropriate accounting treatment in accordance with IFRS 15. (06)
(c) On 1 January 2020, Haval Limited (“HL”) purchased 30,000 four year debentures issued by Oshaan
Limited (OL) at a premium of Rs. 0.5 per debenture with the intention to hold them till maturity i.e. 31
December 2023. The debentures will be redeemed at their par value of Rs. 10 per debenture. The
transaction costs associated with the purchase of the debentures were Rs. 0.1 per debenture. The coupon
interest rate is 12% per annum while the effective interest rate at the time of purchase was 10.1030%.
Interest for the year 2020 & 2021 was actually received. On 31st December 2021 due to certain financial
and liquidity issues and after due consultation with debentures holders OL restructured the payment plan
and terms of debentures was extended by one year. Further, annual three equal installments of Rs.128,000
(principal +interest) will be received at the end of each year by HL.
Required:
Accounting entries for the year ended December 31, 2021 in the books of HL. (06)
Q.4 The following information is presented in draft financial statements of Glory (GL) for the year ended
December 31st, 2021.
Rs. (in million)
Total Assets 90,000
Total Liabilities 34,000
Share Capital 30,000
Retained Earnings 23,500
Other Reserves 2,500
Profit Before Tax 9,450
While reviewing the financial statements, the following issues were noted by Director Finance of GL:
(i) GL has classified investment in Neutral Limited (NL) as an investment in associate and accounted
 Advanced Accounting & Financial Reporting |Page 4 of 5
for using equity method despite having no significant influence over NL.
On 1 February 2021, GL purchased 40,000 shares of NL representing 15% shareholdings at Rs. 80
per share. On 30 September 2021, NL announced interim cash dividend of Rs. 5 per share. NL
reported net profit of Rs. 2.4 million for the year ended.
31 December 2021. The fair value of each share of NL was Rs. 70 as on 31 December 2021.
(ii) Transaction cost incurred on bonds issued by GL was recorded as an asset and being amortized over
five years. Further, half of interest to be paid on 30 June 2022 has been accrued.
On 1 July 2021, GL issued 6,000 bonds of Rs. 1,000 each at a discount of Rs. 50 each with maturity
in five years. The transaction cost associated with the issuance of these bonds was Rs. 20 per bond.
The coupon interest rate is 11% per annum payable annually on 30 June. The approximate effective
interest rate was 13% per annum. Bonds are subsequently measured at amortized cost.
(iii) On 1 January 2021, GL loaned Rs.3 million to another entity. Interest of Rs.0.15 million is payable
annually in arrears. An additional final payment of Rs.3.829 million is due on 31 December 2023.
GL incurred direct costs of Rs.250, 000 in arranging this loan. The annual rate of interest implicit in
this arrangement is approximately 10%. GL has no intention of assigning this loan to a third party at
any time. This transaction is not recorded in the books at all.
(iv) In December 2021 GL sold some of its trade receivables to a debt factor. GL sold Rs. 40 million
receivables to a factor with the factor advancing 80% of the funds in full and final settlement. The
factoring is non-recourse except that GL has guaranteed that it will pay the factor a further 8% of
each receivable which is not recovered within six months. GL believes that its customers represent a
low credit risk and so the probability of default is very low. The fair value of the guarantee is
estimated to be Rs.50,000.This transaction has not yet been accounted for in the books of GL.
(v) GL issued a four year 12% convertible bond on 1 January 2021 for Rs.700, 000 and recorded the full
amount as loan liability. GL incurred issued costs of Rs 30,000 and debited in loan liability. The
convertible bond will be redeemed at its par value at the end of a four year period. The effective
interest of a similar bond without conversion rights was 14% p.a. The effect of the issue costs was to
increase effective interest rate to 15.879%. P.a.
Interest for the year to 31 December 2021 was paid at year end and recorded as an expense and it was
calculated at original par value of loan.
Required:
Determine the revised amounts of profit before tax, total assets, total liabilities & total equity (All equity
components separately) for the year ended December 31st, 2021 after incorporating the impact of above
adjustments. (20)
Q.5 The draft statements of financial position as at 31 December 2020 for Maybach Limited (ML) and its
investees Nissan Limited (NL) and Oppo Limited (OL) are as follows:
Statement of Financial Position as at 31 December 2020.
ML NL OL
Assets Rs.’m Rs.’m Rs’m
Non current
Property Plant and Equipment 500 225 210
Investment in:
NL 205
OL 165
870 225 210
Current assets 232 125 95
Total assets 1,102 350 305
Equity and Liabilities
Equity
Share Capital 50 25 25
 Advanced Accounting & Financial Reporting |Page 5 of 5
Retained Earnings 563 160 175
Other Reserves 189 55 50
802 240 250
Non current liabilities 175 63 30
Current liabilities 125 47 25
Total equity and liabilities 1,102 350 305
Further information:
1. ML had originally acquired 35% of NL’s equity on 1 January 2015 at a cost of Rs. 50 million when
NL’s retained earnings and other reserves amounted to Rs. 80 million and Rs. 10 million
respectively. The fair value of NL’s identifiable net assets on 1 January 2015 was equal to their
book values.
ML acquired a further 45% of NL’s equity on 1 January 2017 at a cost of Rs. 87 million when NL’s
retained earnings and other reserves amounted to Rs.105 million and Rs.15 million respectively.
The fair value of NL’s identifiable net assets on 1 January 2017 amounted to Rs.150 million. The
difference between the fair value and carrying amounts of NL’s net assets at that date was
attributable to plant and equipment which had a remaining useful economic life on 1 January 2017
was 10 years. The fair value of a 35% holding in NL’s equity on 1 January 2017 was Rs.68 million.
ML has adopted the ‘full goodwill’ policy in respect of the acquisition of NL and 20% holding in
NL’s equity had a fair value of Rs. 39 million on 1 January 2017.
2. ML acquired 60% of OL’s equity on 1 January 2019 at a cost of Rs.130 million when OL’s
retained earnings and other reserves amounted to Rs.140 million and Rs.22 million respectively.
The fair value of OL’s identifiable net assets on 1 January 2019 was Rs.200 million. The difference
between the fair value and carrying amounts of OL’s net assets at that date was attributable to plant
and equipment which had a remaining useful economic life on 1 January 2019 of 5 years.
ML has adopted the ‘proportionate goodwill’ policy in respect of the acquisition of OL and 40%
holding in OL’s equity had a fair value of Rs.87 million on 1 January 2019.
3. On 1 October 2020, ML disposed of a 5% holding in OL for cash proceeds amounting to Rs.15
million. Any gain or loss on disposal has been correctly accounted for in the separate financial
statements of ML. The carrying amount of ML’s investment in OL in the statement of financial
position above relates to the fair value of the remaining 55% holding at 31 December 2020. OL’s
profit and other comprehensive income for the year ended 31 December 2020 amounted to Rs.18
million and Rs.12 million respectively.
4. Both investment in NL and OL have been correctly classified as Fair Value Through Profit or Loss
(FVTPL) items in the separate financial statements of ML above in accordance with IFRS 9.
5. A review of investments in NL and OL as Cash Generating Units at 31 December 2020 shows that
their recoverable amounts at that date are Rs.265 million and Rs.255 million respectively.
6. OL’s inventory as 31 December 2020 includes goods bought from NL at a cost of Rs.20 million.
NL had invoiced these goods at a markup of 25%.
7. On 1 January 2020, ML sold a building which had a carrying amount on that date of Rs.50 million
to an unrelated third party for cash disposal proceeds amounting to Rs. 60 million when the fair
value of the building was Rs. 65 million. ML immediately leased back the building for a term of 10
years which was also the building’s remaining useful economic life at 1 January 2020. In above
draft statement of financial position, ML has derecognized the building and reported a gain on
disposal amounting to Rs. 10 million in its statement of profit or loss.
Under the lease back, ML pays an annual rent of Rs. 9.8 million in arrears (On 31 December each year).
The rent paid on 31 December 2020 has been charged as an expense in profit or loss and the interest rate
applicable on ML’s borrowings is 10% p.a.
Required:
Prepare the ML Group Consolidated Statement of Financial Position as at 31 December 2020. (30)
(The End)
 Advanced Accounting & Financial Reporting
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Certified Finance and Accounting Professional Stage – Mock Summer 2022

Answer: 1 (a)
This is a share-based payment transaction where the entity (ML) has a choice of settlement. IFRS 2 Share-
based Payment requires the transaction to be treated as cash-settled if there is a present obligation to settle
in cash. If there is no obligation, the transaction should be treated as equity settled.
Here, ML’s past practice of always settling in cash has created a valid expectation in employees that they
will receive cash. Therefore, there is a constructive present obligation for ML to settle in cash and ML
should account for the scheme as a cash settled transaction.
Cash-settled share-based payments are accounted for as follows:
 An expense should be recognised over the vesting period (2 years)
 A corresponding liability should be recorded in the statement of financial position
 The liability should be measured at fair value and this fair value updated each year end to give the
best estimate of amount to be paid
 Any expected leavers over the vesting period should be removed from the number of employees as
they will not receive the share-based payment (the best estimate at each year end should be used).
Calculation
The fair value of the liability at the year end is valued using the year end share price as this represents the cash
value at that date.
The liability as at 31 May 2020 and the corresponding expense to be recognised in profit or loss for the year
ended 31 May 2020 is calculated as follows:
[(60 managers – 10 leavers) x 120,000 shares x Rs1, 800 year end fair value x ½ vested] = Rs. 5, 400, 000,
000.
(b)
Amount included in statement of financial position at 30 September 2020.
Number/Amount
Explanation
Number of executives 190 Use expected number based on latest
estimates as a non-market vesting condition

Options vesting for each executive 2,000 Use expected number based on latest
estimates as a non-market vesting condition

Impact of expected share price None This is a market-based vesting condition

and is ignored for this purpose

Fair value of option Rs. 0·50 Use fair value on grant date per IFRS 2
Proportion vesting 2/3Two years through a three-year vesting period

Included in equity Rs. 126,667 (190 x 2,000 x Rs0.50 x 2/3)

Amount included in statement of profit or loss and other comprehensive income for the year ended 30
September 2020
Cumulative amount recognised in equity
at 30 September 2020 (see above) Rs.126,667
Amount recognised in previous year Rs (50,000) 200 x 1,500 x Rs.0·50 x 1/3
––––––––
So included in current year’s profit or loss Rs 76,667
 Advanced Accounting & Financial Reporting
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Certified Finance and Accounting Professional Stage – Mock Summer 2022
Answer: 2 (a)
Principles not followed by Ahmed:
Ahmed is not following objectivity and integrity (1.5 mark) as he has been manipulating accounts. He is
not preparing financial statements fairly and truthfully for which he was principally responsible. Moreover,
commanding another professional to present false financial information, Ahmed is not depicting
Professional behavior. (1 mark)
Threats faced by Khubaib:
Khubaib is facing Intimidation threat (1.5 mark) as Ahmed has made success of this proposal a condition
for his job stability.
Safegaurds: (3 marks)
Identified threat is significant as Khubaib is being instructed from the highest level of management. In
order to reduce the threat to an acceptable level, the following safeguards should be applied.
 Consult with superiors such as audit committee or those charged with governance or with a relevant
professional body.
 Where it is not possible to reduce the threat to an acceptable level, Khubaib shall refuse to remain
associated with the financial information.
 He may consider to obtain legal advice or may consider resigning from the post.
(b)
Volvo General Insurance Limited
Statement of Comprehensive Income
for the year ended 30 June 2021
Notes 2021
Rs. In '000'
Net insurance premium 1 92,700 (M-2)
Net insurance claims expense 2 (22,500) (M-2)
Net commission and other acquisition costs (11,700) (M-0.5)
Management expenses (23,400) (M-0.5)
Underwriting results 35,100
Rental income 8,550 (M-0.5)
Investment income 17,100 (M-0.5)
Other income 810 (M-0.5)
Other expenses (5,400) (M-0.5)
Operating Profit 56,160
Finance cost (4,050) (M-0.5)
Share of profit from associates 1,890 (M-0.5)
Profit before tax 54,000
tax expenses (6,750) (M-0.5)
Profit after tax 47,250
Other Comprehensive income
gain on AFS investments - net 5,220 (M-0.5)
Total comprehensive income for the year 52,470
Notes to the financial statements for the year ended 30 June 2021
1. Net Insurance Premium Rs. In '000'
Written gross premium 117,000
Unearned premium – opening 66,600
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Unearned premium – closing (64,800)
Premium earned 118,800
Reinsurance premium ceded 27,000
Prepaid reinsurance premium-opening 31,500
Prepaid reinsurance premium-closing (32,400)
Reinsurance expense 26,100
92,700

2. Net Insurance claim expense

Claims paid 54,900
Outstanding claims - closing 46,800
Outstanding claims - opening (43,200)
Claims expense 58,500
Reinsurance & other recoveries revenue (36,000)
22,500

Answer: 3 (a)
As per IFRS 15, in cases where entity’s performance does not create an asset with alternative use, the entity
can recognize revenue over time if the entity also has an enforceable right to payment for performance
completed to date. As per agreement, EL is entitled for remaining consideration only after delivery of each
lot so revenue should not be recognized over time as suggested by CFO. Proportionate revenue should be
recognized upon transferring control i.e. delivery of each lot consisting of 20 machines to PL. Goods
manufactured till year-end should be included in EL’s closing inventory and the advance received from PL
should be shown as contract liability.
Contract cost
The cost of Rs. 4 million for 1600 hours spent is correctly expensed out as such cost would have been
incurred whether contract was obtained or not. However, Rs. 6 million paid for bonus should be capitalized
as contract cost being an incremental cost of obtaining a contract and should be amortized over contract
period on a systematic basis. This contract costs should not be amortized in year 2021 as no related revenue
has been recognized in 2021.
(b)
(i) The contract to supply is not sufficient to recognise revenue. It is necessary that control of the goods
have actually transferred to the customer. This is the case for 30,000 units.
The deferred payment does not prevent revenue from being recognised, but the consideration needs to
be measured at the fair value, on the transaction date, of the amount receivable. The fair value needs
to reflect a discount allowing for the time value of money, as a result of the extended credit period.
The discount rate will be 10%, ZLs cost of capital. Hence revenue will be recognised as follows:
30,000 units x Rs. 100 x 0.909 = Rs. 2, 727, 000.
The discount will be recognised as finance income as time passes, on a time apportioned basis. As the
sale took place on 31 March 2021, no time has yet passed to trigger the recognition of finance
income.
Journal: Rs. Rs.
Dr trade receivables 2, 727, 000
Cr Revenue 2, 727, 000
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(recognition of revenue and trade receivables at fair value of consideration receivable)
(ii) Again, the same principles apply. Revenue is recognised when control of the goods or services are
transferred to the customer. Here, cash was received in advance. Nevertheless, revenue is only recognised
when the service is delivered to the customer. Any excess cash retained is recognised as deferred income, a
liability. If the cash is non-refundable, this does not change the timing of recognition of revenue. However,
if the customer’s right to the service expires, and the customer has no right to a refund, the revenue should
then be recognised.
Total cash received in year ended 31 March 2021: 2000 x Rs 1, 000 =
Rs.2, 000,000 Total room nights provided 400
Revenue recognised = 400 X Rs.1, 000 = Rs. 400, 000 Deferred revenue = 2,000,000 – 400,000 =
1,600,000
Journal: Rs. 000 Rs 000
Dr Cash 2,000
Cr Revenue 400
Cr Deferred revenue
1,600
(recognition of revenue, deferred revenue and cash received)
(c)
Debit Credit
31-Dec-21 Bank 36,000
Interest income 31,736
Investment in debentures 4,264
(M-2)
31-Dec-21 Investment in debentures 30,026
P&L 30,026
Amortisation Schedule(Without modification)
Year Opening Interest income(OER) receipts Closing
2,020 318,000 32,128 (36,000) 314,128
2,021 314,128 31,736 (36,000) 309,864
PV of modified terms uing OER
Present Value as on 31st December 2021 of amended terms using OER
Year Inflows/(outflow) PVF PV
2,022 128,000 0.908 116,255
2,023 128,000 0.897 114,847
2,024 128,000 0.850 108,787
339,889
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Answer: 4

PBT Total Total Total

Assets Liabilities Equity
Retained Other Share Capital
Earnings Reserves
Rupees in million
As Given 9,450.00 90,000.00 34,000.00 23,500.00 2,500.00 30,000.00
(i) Dividend(40,000x5) 0.20 0.20 0.20 - - (M-1)
Reversal of share of (0.33) (0.33) - (0.33) - - (M-2)
profit
(2400/12x11x15%)
Loss on Fv adjustment (0.40) (0.40) - (0.40) - - (M-1)
of shares(40,000x(80-
70)

(ii) Transaction cost 0.012 (0.108) (0.120) 0.012 - - (M-2)

(120/5x6/12)
Additional Finance cost (0.033) 0.033 (0.033) - - (M-2)

(iii) Financial Asset(3+0.25) 3.25 - - - - (M-0.5)

Financial Asset - (3.25) - - - (M-0.5)
Interest 0.33 0.33 0.33 (M-2)
Income(3.25*10%)
Receipt 0.15 (M-0.5)
Receipt (0.15) (M-0.5)

(iv) Proceed 32.00 - - - - (M-1)

Receivables - (40.00) - - (M-1)
Loss (8.00) - - (8.00) (M-1)
Separate FA & Liability - 0.50 0.50 - (M-1)

(v) Initial adjsutment (0.03) 0.03

Interest adjustment (0.02) 0.02 (0.02)
9,441.76 89,992.19 34,000.40 23,491.76 2,500.03 30,000.00
Working Rs in million
(w-1)
700,000 (30,000.00) 670,000

Year Cash flow PVF @15.879% PV

1 (84,000.00) 0.862969132 (72,489.41)
2 (84,000.00) 0.744715722 (62,556.12)
3 (784,000.00) 0.64266668 (503,850.68)
(638,896.20)
 Advanced Accounting & Financial Reporting
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Equity Reserve initial 31,103.80
Debt Initial Value 638,896.20

Exising value of debt 670,000.00

Adj.
Increase in Equity reserve by 31,103.80
decrease in decrease in debt by 31,103.80

Interest paid 84,000.00

Interest expense 101,450.33

Adj.
Increase in expense by 17,450.33
Increase in debt by 17,450.33

Answer: 5
ML Group CSOFP as at 31.12.2020

Assets Rs.’m
Non current
Property Plant and Equipment (W1) 988.1
(W2) 26
1,014.1
Current (232+125+95- (20 X 25/125) 448
Total assets 1,462.1

Equity and Liabilities

Equity
Share Capital 50
Retained Earnings (W6) 479.7
Other Reserves (W8) 241.9
Equity attributable to owners of parent 771.6
Non controlling Interests (W10) 169.3
Total Equity 940.9
Non current liabilities (W4) 320
Current liabilities (W5) 201.2
Total equity and liabilities 1,462.1

Workings
W1. PPE Rs.’m
Given amounts:
ML 500
NL 225
OL 210
935
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Adjustments:
Fair value gains on acquisition of:
NL (150-[25+105+15]) 5
OL (200-[25+140+22]) 13
Accumdeprec on FV gains:
NL (5/10) X 4 (2)
OL (13/5) X 2 (5.2)
Reinstatement of ML’s plant in sale and lease back
Transaction (note* below) 50X9/10 45
OL impairment loss attributable to PPE (W3) (2.8)
988
Note* The sale and lease back transaction did not meet the IFRS 15 conditions for a sale. This is because
ML retained substantially all economic benefits relating to the asset (has right to use the asset over the entire
remaining conomic life). Therefore the substance of the transaction is that of a loan.

W2. Goodwill on acquisition of:

i) NL

Cost of acquisition (68+87) 155

NCI at acquisition 39
Less FV of identifiable NA
Goodwill at acquisition 44
Less impairment loss (W4) (18)
Carrying amt at 31.12.2020 26

ii) OL
130
Cost of acquisition
NCI at acquisition 40%X200 80
Less FV of identifiable NA at acquisition
Goodwill at acquisition 10
Impairment loss (4) (10)
Carrying amount at 31.12.2020 -

W3. Review of NL and OL as CGUs for impairment:

i) NL

Carrying amounts at 31.12.2020:

Identifiable:
Given (Equity) 240
Net FV gain (5-2) 3
Unrealised profit in inventory 25X20/125 (4)
239
Goodwill 44
Total 283
 Advanced Accounting & Financial Reporting
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Recoverable amount (given in question) 265
Total loss (283-265) 18
Allocated to Goodwill (18)

ii) OL
Carrying amounts at 31.12.2020:
Identifiable:
Given (Equity) 250
Net FV gain (13-5.2) 7.8
257.8
Grossed up Goodwill 10 X 100/60 16.7
Total 274.5
Recoverable amount (given) 255
Total loss (274.5-255) 19.5
Allocated to gross goodwill (maximum) (16.7)
Balance to PPE (there are no other intangible assets) 2.8
Loss allocated to goodwill to be recognised 16.7X 60% 10

W4. Non current liabilities

Given amounts:
ML 175
NL 63
OL 30
Adjustments:
Non current portion of sale and lease back loan:
Liability at 31.12.20 (60X1.1-9.8)=56.2
Liability at 31.12.21 (56.2X1.1-9.8) 52.0
320

W5.Current liabilities
Given amounts:
ML 125
NL 47
OL 25
Adjustments:
Current portion of sale and lease back loan (56.2-52) 4.2
201.2
W6 Group Retained Earnings
ML RE 563
Share of post acquisition RE of
NL (35%[105-80]+80%[160-105]) 52.8
OL (60%[170.5(W7)-140]+55%[175-170.5]) 20.8
Adjustments:
Reversal of gains on remeasurement/disposal of FVTPL assets
- NL (205-87-50) (68)
- OL (165-15-130) (50)
Gain on derecognition of NL as associate:
Fair Value at date of derecognition 68
 Advanced Accounting & Financial Reporting
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Carrying amt of associate (equity value):
Cost 50
Share of post acquisition
RE 35%(105-80) 8.8
Other reserves35%(15-10) 1.8
(60.6) 7.4
Accum FV depreciation:
- NL 80%X2 (1.6)
- OL(60%X13X1.75/5+55%X13X0.25/5) (3.1)
Unrealised profit in closing inventory 4X80% (3.2)
Reversal of gain on sale and lease back of plant (10)
Finance cost on sale and lease back loan 10%X60 (6)
Depreciation of sale and lease back plant50/10 (5)
Reverse of lease rentals 9.8
Impairment losses (W3):
- Goodwill in NL 80%X18 (14.4)
- Goodwill in OL (10)
- PPE in OL (2.8)
479.7

W7. OL Reserves at 1.10.2020

Other Other
Reserves reserves
Rs.’m Rs.’m
Balances at 31.12.2020 175 50
Less profit for the year 18X3/12 (4.5)
Less OCI for the year 12X3/12 (3)
Balances at 1.10.2020 170.5 47

W8. Other Reserves

Rs.’m
ML OR 189
Share of post acquisition OR of
NL (35%[15-10]+80%[55-15]) 33.8
OL (60%[47(W7)-22]+55%[50-47]) 16.7
Adjustments on reducing holding in OL:
 Advanced Accounting & Financial Reporting
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022

Disposal proceeds 15
Identifiable NA transferred to NCI (W9) (12.6) 2.4
241.9
Net assets transferred to NCI on ML reducing holding in OL
W9. OL identifiable NA on 1.10.2020: Rs’m
Share capital 25
Retained Earnings (W7) 170.5
Other reserves (W7) 47
Net FV gain (13-13X1.75/5) 8.5
251
Amount transferred to NCI 5%X251 12.6
W10. NCI in
i) NL
At acquisition 39
Post acquisition changes:
RE 20%(160-105) 11
FV depreciation 20%X2 (0.4)
Unrealised profits 20%X4 (0.8)
Goodwill loss 20%X18 (3.6)
Other Reserves 20%(55-15) 8
53.2

ii) OL
At acquisition 80
Post acquisition changes:
RE [40%(170.5-140)+45%(175-170.5)] 14.2
FV depreciation [40%X13X1.75/5+45%X13X0.25/5] (2.1)
Net assets from owners of parent 12.6
Other Reserves [40%(47-22)+45%(50-47)] 11.4
116.1
Total NCI (53.2+116.1) 169.3

(The End)
 The Professionals’ Academy of Commerce
Pakistan’s Leading Accountancy Institute
Certified Finance and Accounting Professional Stage Mock Examinations
25 May 2022
3 hours – 100 marks
Additional reading time - 15 minutes

Advanced Corporate Laws & Practices

Q.1 (a) M/s Rich Investments Limited a duly registered NBFC holds a license to provide investment finance
services. The company operates two open-ended collective investment schemes as follows:
Name of the Scheme Fund Size
RIL High Esteem Equity Fund (HEEF) PKR 10.00 billion
RIL Improved Money Market Fund (IMMF) PKR 5.00 billion
Due to the recent interest rate hike in the country, the IMMF is performing well and its unit-holders are
satisfied with its performance, however, the unitholders of HEEF are considering to sell their units being
dissatisfied with its performance. The Fund Manager of scheme is cognizant of the fact and to earn good
returns, he is considering to invest a significant portion of the HEEF’s funds in foreign stock markets as
the Pakistan Stock Exchange is underperforming and causing losses to the investors.
Required:
i) Keeping in view the relevant provisions of appliable laws, advise the maximum amount which the
Fund Manager of HEEF can invest abroad assuming USD1=PKR190; (03)
ii) Advise the regulatory approval required to invest abroad and the procedure for getting such
approvals. (03)
(b) M/s Ameer Leasing Limited (ALL) is a deposit-taking lending NBFC duly licensed by SECP. The
Company has equity of PKR 7.00 billion as per the last audited financial statements and has a deposit
base of 5.00 billion raised by issuance of Certificate of Investments.
The company has placed an amount of Rs. 1,200 million with Fine Bank Limited (FBL) which has a
credit rating of AA (Double-A). The credit rating evaluation for the current year is in progress and
keeping in view the financial position of the bank, it is estimated that the rating might deteriorate to A
(Single-A). Currently, the portfolio of ALL with FBL is as follows:
Nomenclature Rs. in million
Investment in shares of FBL 500
Placement of funds with FBL 1,200
Investment in TFC issued by FBL 200
Deposits in saving accounts of FBL 100
Investment in Term Deposit of FBL 50
Required:
i) You are required to calculate whether the exposure of ALL with FBL is in compliance with the
provisions of NBFC Non-Banking Finance Companies and Notified Entities Regulations, 2008.
(04)
ii) What changes are required to be made in the portfolio of ALL with FBL if the credit rating
deteriorated to A (Single-A). (04)

Q.2 M/s Red Industries Limited is maintaining a contributory provident fund scheme for its employees. All
the contributions by the employees and the Company are transferred to a provident fund trust registered as
 Advanced Corporate Laws & Practices |Page 2 of 5
RIL Provident Fund Trust and being governed by a three-member Board of Trustees. The average rate
return on the investments made by Trustees during the last financial year is ranging around 12% per
annum.
Due to growth in sales, M/s Red Industries Limited is facing liquidity problems. The current borrowing
rates of M/s RIL from different Banks are around 3M Kibor plus a spread of 3%. To overcome the
liquidity issues, the CFO of the RIL has put a proposal before the Trustees to place PF Trust funds
amounting to Rs. 100 million with RIL under a written agreement for one year with a fixed mark-up rate
of 1-year KIBOR plus 4%. The total size of the PF fund is Rs. 1.00 billion out of which Rs. 500 million
have been invested in T-Bills and Rs. 500 million needs to be invested. The accountant of the Trust has
prepared the following proposal:
Sr. Investment Avenue Rupees in Million
01 Place funds with RIL being constituting company under written 100
agreement.
02 Invest funds in listed equity security in the Oil and Gas Sector as 200
follows:
a) Buy 400,000 shares of ABC Petroleum Limited at a market price of 32
Rs. 80 per share. The investee has 10 million shares in issue.
b) Invest an amount of Rs. 30 million by buying 8% shareholding in 30
XYZ Oilfield Limited.
c) Invest the remaining amount of the available limit in Listed TFCs 138
issued by M/s MNO Gas Limited
Required:
Comment on each of the above proposal whether they are valid or not in light of the provisions contained
in the Companies Act, 2017 and Employees Contributory Fund (Investment in Listed Securities)
Regulations 2018; (05)

Q.3 Falcon (Private) Limited holds 15% shareholding in Seagull Limited (a listed company). Eagle Limited
(listed company) holds 40% shareholding in Seagull Limited. The directors & associates of Eagle Limited
also hold an 8% shareholding in Seagull Limited. Both Eagle and Seagull have two directors in common.
In order to invest its surplus funds, M/s Eagle Limited wants to acquire Falcon’s 15% shareholding (i.e.
15 million shares of face value Rs. 10 each and break-up value Rs. 110 each) in Seagull @ Rs. 100/share.
Mr. Crowe, Chief Financial Officer, at Eagle advised the board that the transaction requires board
approval followed by approval of the Competition Commission of Pakistan.
The Board advised Mr. Crowe to consult “The Parrots”, a professional law firm.
Required:
You are a law practitioner at the Parrots and the partner in charge has advised you to assist with the
following two questions:
(a) Corporate and Regulatory approvals are required with respect to this intended acquisition by Eagle.
(04)
(b) If take over laws are applicable, what will be the minimum size of the public offer and public offer
price. (06)

Q.4 M/s Jia Motor Limited, an automotive manufacturer has recently started manufacturing in Pakistan. In
order to sell its vehicles, the Company is considering to enter into exclusive sales and distribution
agreements with its prospective dealers.
The ‘draft dealership agreement’ received from the Company’s legal counsel has the following two
important provisions:
 The authorized dealers will not compete with any other authorized dealer of Jia Motors Limited;
 Advanced Corporate Laws & Practices |Page 3 of 5
 The authorized dealers will have exclusive territorial jurisdiction and will not market their name in
the territorial jurisdiction of other authorized dealers.
Required:
You are required to explain whether such conditions can be made part of the agreement, keeping in view
the provisions of the Competition Act, 2010; (06)

Q.5 M/s Great Baba Limited is engaged in the business of manufacturing paper products. The company is
listed on the Pakistan Stock Exchange and has nine directors on its Board elected in the recently held
AGM. The composition of the Board is as follows:
Independent Directors 2 Male independent directors
1 Female independent director
Executive Directors 3 Executive directors (All from Baba’s Family)
Non-Executive Directors 3 Non-executive directors (Two Directors are from Baba’s Family)
The Directors from the Baba’s Family are close relatives as defined in the Companies Act, 2017.
In a recent Board meeting of GBL the following agenda items were discussed during the meeting;
a) Purchase of Raw Material from M/s Baba Enterprises
The CFO of the Company has requested the Board to approve the purchase of some fixed assets from
M/s Baba Enterprises. The five directors from Baba Family are partners in Baba Enterprises.
Required:
Being Company Secretary of the Company, advise the Board about the legal formalities to be fulfilled
to carry out this transaction. (05)
b) Payment of Interim Cash Dividend
During the meeting the Board has approved an interim cash dividend for its shareholders one of the
directors suggested that the dividend should be paid on the eve of Eid which is going to be celebrated
after 40 days;
Required:
Being Company Secretary of the Company, advise the Board whether the suggestion of the Director
can be implemented. (04)
c) Further Issue of Shares
The company has bought back 10% of its total paid-up capital in the previous quarter and is holding
these shares as treasury shares. The company is now facing financial issues and is considering to sell
the treasury shares, however, the legal adviser suggested that the Company cannot sell these shares
before the expiry of six months from the date of closure of the purchase period.
Despite buy-back activity, the market price of the share is less than the par value for a continuous
period of 120 days. In order to improve the liquidity of the Company, the Board is considering to
issue 20% right shares at a discounted price.
Required:
(a) Advise whether the Board can proceed to offer 20% right shares? (02)
(b) What legal approvals would be required for the following two options: (04)
 Discount is 8%;
 Discount is 12%
d) Directors Training Program (DTP)
Mr. Khurram has been recently hired as an independent director, except for him all the members of
the Board are certified under the Directors Training Program. Mr. Khurram expressed his intention
that he will acquire DTP Certification within a period of 2 years, to which another director suggested
that the Listed Companies (Code of Corporate Governance) Regulations, 2019 do not make it
mandatory to get DTP certification, it is only an encouraging requirement.
Required:
Express your views on the above discussion. (05)
 Advanced Corporate Laws & Practices |Page 4 of 5
Q.6 Frequency Limited (FL) is in process of making a public offer of 100 million ordinary shares having face
value of Rs. 10 each and debt securities amounting to Rs. 1,000 million having face value of Rs. 10,000
each. Shares are to be issued at fixed price while debt securities will be issued through book building
method. 75% of the securties will be issued through book building. Following bids were received for
issue of debt securities.
Bidder No. of securities bid Profit rate
1 9,000 10.00%
2 11,000 10.20%
3 10,000 10.20%
4 8,000 10.40%
5 15,000 10.80%
6 8,000 11.00%
7 16,000 11.25%
8 6,000 11.50%
9 3,000 11.80%
10 2,000 12.00%
11 4,500 12.20%
12 5,500 12.20%
13 7,000 12.20%
14 10,000 12.50%
15 12,500 13.00%
16 9,000 13.50%
Total 136,500
Proceeds from shares are to be used for expansion of existing production facilities while debt securities
proceeds are to be utilised for a new joint venture with international investor.
Required:
(a) Based on above:
(i) What will be cut-off profit rate under reverse Dutch auction method. (03)
(ii) Advise about the time limit for publication of prospectus and supplement to prospectus relevant
to debt securities. (02)
(iii) Advise what disclosures are to be made by FL after successful issuance of above securities. (03)
(b) Assume that process of issuance of securities went successful, CEO of company is proposing to defer
the expansion plan and to utilise the funds for repayment of existing loans. Advise FL about the
requirement to be fulfilled for this purpose and the process to be followed. (05)

Q.7 The Directors of M/s Dandy (Private) Limited (DPL) are considering to get the company listed on the
Pakistan Stock Exchange. The Company Secretary gave a presentation to the Board regarding
requirements of listing e.g. conversion of status to public limited, enhancement of the number of
directors, requirements of paid-up capital, publication of the prospectus, book building, public
subscription etc. After the presentation, the Board members realized that getting a company listed is a
long and extensive process, whereas they have short available time for this. One of the Directors
suggested that the Board should consider the option of “Reverse Merger” with any listed shell company
which is the shortest way to get the status of a listed Company.
Required:
Being a consultant of the DPL you are required to advise the Board of DPL regarding the following in
light of the provisions contained in the Rule Book of the Pakistan Stock Exchange?
(a) What is the procedure for a reverse merger? (06)
(b) What are the conditions which need to be fulfilled by the surviving entity after the reverse merger?
(06)
 Advanced Corporate Laws & Practices |Page 5 of 5
Q.8 Mr. Ali, a qualified chartered accountant, recently appointed as company secretary of M/s Malta Limited
(ML), a listed company. Certain laws and regulations and ethical requirements are applicable on ML for
privacy of price sensitive information and disclosure of information in certain circumstances.
You are required to briefly discuss fundamental principles of ethics applicable on Mr. Ali. (06)

Q.9 (a) You are a legal advisor of M/s Pasha Limited a Company listed on the Pakistan Stock Exchange. The
Securities and Exchange Commission of Pakistan has recently imposed penalties on the Company due to
some non-compliances with various provisions of law committed in the recently held Annual General
Meeting.
Immediately after imposition of penalties, a Board meeting was called and it was unanimously agreed that
in order to avoid such instances in the future, the company will use properly developed checklists for
conducting such meetings. As a first step, the Company has given you the assignment to develop a
comprehensive checklist for the responsibilities of its Company Secretary to be followed for conducting
general meetings.
Required:
Keeping in view all applicable provisions of law develop a checklist for the Company Secretary to be
followed for conducting general meetings. (08)
(Ignore the provisions related to specific agenda items, also ignore the provisions related to
responsibilities of the Chairman, the CEO, and the Share Registrar)
(b) M/S Tabdeeli Mills Limited (TML) is importer of pharmaceutical raw material which is consumed by
local pharma companies. M/s Tareen Pharma Limited (TPL) one of the customers of TML is facing
financial difficulties and resultantly TPL could not pay amount due to TML. Keeping in view the
financial health of company legal advisor of TPL suggested to apply for order of mediation.
Required:
According to provisions of Copmpanies Act, 2017 advise the management of GL:
i) To whom TPL can apply for mediation order and relevant information to be attached with application
of mediation. (02)
ii) What powers a mediator can exercise for the purpose of mediation. (04)

(The End)
 Advanced Corporate Laws & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022

Answer: 1 (a)
(a) (i) Answer can be given using following provisions:
Forex Manual Chapter 20: 14. Investment Abroad by Locally Established Mutual Funds.
(i) Locally established mutual funds are allowed to invest abroad for the purposes of
diversification of their asset classes/portfolio, to the extent of 30% of the aggregate funds
mobilized (including foreign currency funds), in permissible categories subject to a cap of US$
15 million at any given time. The investment made abroad must strictly follow the scope
approved by Securities and Exchange Commission of Pakistan (SECP) and subject to all other
terms and conditions as specified for the operations and investments abroad by SECP.
Funds which can be invested abroad are as follows:
10 billion x 30 / 190 = 15.79M
Cap: USD 15M
So they can invest upto 15M = 15M x 190 = PKR 2.850billion
(a) (ii) Such funds would need prior approval of State Bank. In this regard, each interested locally
established mutual fund is required to apply, through an Authorized Dealer, to the Director,
Exchange Policy Department, State Bank of Pakistan by providing details of the proposed
operations alongwith the related documents. Each request will be evaluated on a case to case basis
and will be responded accordingly.
(b) (i) (xv) “Exposure” includes Finance, subscription to or investment in securities, debt instruments,
units or certificates or shares of a Notified Entity , placements, deposits with Financial Institutions,
derivatives, Margin Trading System (MTS) or any mechanism that replaces it, but does not include:
(a) obligations under letters of credit and letters of guarantee to the extent of cash margin held by an
NBFC;
(b) Finance provided to financial institutions through REPO transactions with underlying statutory
liquidity requirement eligible securities;
(c) deposits in current and savings accounts other than term deposits;
Rupees in Million
Equity of ALL 7,000
Maximum Fund based Exposure Limit 15% 1,050

Working of Exposure
Investment in shares of FBL 500 500
Placement of funds with FBL
1,200
@ 25% See Reg 17 (4) (f) 25% 300
Investment in TFC issued by FBL 200 200
Deposits in saving accounts of FBL 100 0
Investment in Term Deposit of FBL 50 50
1,050

So the exposure is line with regulations.

 Advanced Corporate Laws & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
(b) (ii) Changes required to be made.
If credit rating deteriorated to single A then:
Rs in Million
Equity of ALL 7,000
Maximum Fund based Exposure Limit 15% 1,050

Working of Exposure
Investment in shares of FBL 500 500
Placement of funds with FBL @ 25% Reg
1,200
17 (4) (f) 75% 900
Investment in TFC issued by FBL 200 200
Deposits in saving accounts of FBL 100 0
Investment in Term Deposit of FBL 50 50
1,650
Excess exposure - 600
In such case ALL has to reduce its exposure by Rs. 600 million.

Answer: 2
Sr. Investment Avenue Rupees in Answers:
Million
01 Place funds with RIL being 100 Not valid: Because a company
constituting company under can invest in listed securities
written agreement. only and not under an
agreement.

02 Invest funds in listed equity 200 Not Valid: Because the total
security in the Oil and Gas limit for one sector is 20% of
Sector as follows: 30% of fund size which comes
at Rs.1,000M x 30% x 20% =
Rs. 60M
a) Buy 400,000 shares of ABC 32 Not Valid: Although the
Petroleum Limited at a proposal is to buy 4% stake
market price of Rs. 80 per (against limit of 5%) but the
share. The investee has 10 amount exceeds the single
million shares in issue. Co.’s limit which is 10% of
30% of Rs. 1,000 = Rs. 30M
b) Invest an amount of Rs. 30 30 Not Valid: The amount is
million by buying 8% within limit but the 8% stake is
shareholding in XYZ higher then the allowed limit of
Oilfield Limited. 5%.
c) Invest the remaining amount 138 Not valid: The amount is over
of the available limit in the allowed limit.
Listed TFCs issued by M/s
MNO Gas Limited
 Advanced Corporate Laws & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Answer: 3
Corporate and Regulatory approvals
 Any investment requires approval of the board of directors (Sec 183 Companies Act 2017)
 Since Seagull is an an associate of Eagle. Therefore, Eagle will need approval of its shareholder
through special resolution ( Sec 199 Companies Act 2017)
 Since Investment value is more than Rs. 100MM, therefore, it will require approval of
competition commission of Pakistan as per take-over laws
 This investment will trigger take-over laws, therefore, Eagle will also need to go for mandatory
public offer.
Minimum size for public offer

Shares "MM" %
Total Shareholding 100 100%

Less Eagle existing shareholding -40 -40%

Eagle associates (acting in consert) -8 -8%

Main transaction (Falcon's holding) -15 -15%

-63 -63%

Remaining shares 37 37%

Public Offer 18.5 18.5%
(50% of remaining shares)

Minimum offer price

Higher of
Negotiated transaction price 100
Break-up value 110
Market Value XXX
Therefore, Public Offer price shall be Rs. 110/share.

Assumptions
1 Since share price of seagull trading on stock exchange is not given so we assume its below break-up value
2 In the absence of information, we assumed Seagull's shares are not frequently traded.

Answer: 4
Answer can be given using following provisions:
As per section 4, of the Competition Act, 2010 such agreements are prohibited, as given below:
4. Prohibited Agreements. ___
(l) No undertaking or association of undertakings shall enter into any agreement or, in the case
of an association of undertakings, shall make a decision in respect of the production,
supply, distribution, acquisition or control of goods or the provision of services which have
the object or effect of preventing, restricting, or reducing competition within the relevant
market unless exempted under section 5.
 Advanced Corporate Laws & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
However, the Company can enter into such agreement after taking exemption from CC as
provided in section 5.
5. Individual exemptions. ___
The Commission may grant an exemption from section 4, with respect to a particular practi ce
or agreement, if a request for an exemption has been made to it by a party to the agreement or
practice and the agreement is one to which section 9 applies.
In view of the above the proposed conditions can be made part of the agreement after getting
exemption from CCP.

Answer: 5
Part A: Purchase of Raw Material from M/s Baba Enterprises
1. First of all, the related party transactions need to be considered by the Audit Committee.
2. After consideration/recommendation by the Audit Committee, the Board will consider these
transactions, however in the given scenario, the majority of the directors are interested in this
transaction, therefore, this transaction will be referred to Shareholders.
3. The shareholder will consider this transaction and will approve it as a special resolution.
Part B: Payment of Interim Cash Dividend
As per the provisions of the Companies (Distribution of Dividends) Regulations, 2017 the interim
cash dividend is to be paid within 10 working days, therefore, the suggestion cannot be
implemented.
3. Period for making payment of dividends: -
(1) Subject to section 243 of the Act, the chief executive officer of every company is responsible to
make the payment of cash dividend within the period mentioned in sub-regulation (2) below: -
(2) Every company shall pay cash dividend in the following manner-
(i) In case of final dividend, it shall be paid within ten working days from the date of its
declaration;
(ii) In case of interim dividend and book closure is announced, it shall be paid within ten
working days from the start of the book closure announced for determination of dividend
entitlement and period of book closure shall not exceed three working days; and
(iii) In case of interim dividend without announcement of book closure, it shall be paid within
ten working days from the date of its declaration.
(3) Every listed company shall ensure that book closure must be started for determination of
interim dividend entitlement within fifteen days of the date on which such dividend is
approved by the board.”.
Part C: Further Issue of Shares
(a) As per the the Listed Companies (Buy-Back of Shares) Regulations, 2019: Regulation Number
13 (5), the purchasing company shall not issue further capital, other than bonus shares unless
the treasury shares held by it are disposed of.
(b) Approvals required:
If the discount is 8% then approval by the shareholders will be required.
However, if the discount is more than 10% then the approval of commission would also be
required, relevant provision is as follows:
 Advanced Corporate Laws & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Companies Act, 2017 Section 82 (d) the issue of shares at discount must be sanctioned by the
Commission:
Provided further that approval of the Commission shall not be required by a listed company for
issuing shares at a discount if the discounted price is not less than ninety percent of the par value;
Part D: Directors Training Program (DTP)
As per requirements of Companies (Manner and Selection of Independent Directors Regulations,
2018) every independent director shall complete DTP/avail exemption within 12 months from his
appointment.
(2) Every independent director, after being appointed/ elected on board, shall complete Directors’
Training Program (DTP) or avail exemption from the Commission as per the requirements of
Regulation 20 of the Listed Companies (Code of Corporate Governance) Regulations, 2017
within twelve months of such appointment/election.

Answer: 6
(a) (i) At the close of the bidding period, cut-off profit rate shall be determined on the basis of reverse
Dutch Auction Method by arranging all the profit rate in an ascending order along with the number
of debt securities and the cumulative number of debt securities bid for at each profit rate. The cut
off profit rate is determined by increasing the profit rate to the extent that the total number of debt
securities offered under the Book Building portion are subscribed.
No. of securities Cummulative number
Bidder bid of securities Profit rate
1 9,000 9,000 10.00%
2 11,000 20,000 10.20%
3 10,000 30,000 10.20%
4 8,000 38,000 10.40%
5 15,000 53,000 10.80%
6 8,000 61,000 11.00%
7 16,000 77,000 11.25%
8 6,000 83,000 11.50%
9 3,000 86,000 11.80%
10 2,000 88,000 12.00%
11 4,500 92,500 12.20%
12 5,500 98,000 12.20%
13 7,000 105,000 12.20%
14 10,000 115,000 12.50%
15 12,500 127,500 13.00%
16 9,000 136,500 13.50%

Total 136,500
75,000 securities are to be issued under book building portion. According to Reverse Dutch
Auction Method, required securities will be issued when profit rate is reduced to 11.25%.
(ii) FL shall publish the prospectus at least one day before the commencement of registration of bidders
by the book runner.
Within three working days of the closing of the Bidding Period, FL itself or through its Consultant
to the Issue, if any shall publish supplement to the prospectus in those newspapers in which the
 Advanced Corporate Laws & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
prospectus was earlier published and also disseminate the same to the securities exchange, banker
to an issue and underwriter.
(iii) FL upon completion of public offering of securities shall,
a) report detailed break-up of the utilization of the proceeds of the issue in its post issue
quarterly/half-yearly and annual accounts till the fulfillment of the commitments mentioned in
the prospectus; and
b) submit a Half yearly progress report and annual progress report reviewed by the auditor, to the
securities exchange till the fulfillment of the commitments mentioned in the prospectus stating
the following:
“Implementation status of the project/commitment made in the Prospectus and detailed break-
up of utilization of the proceeds raised from the issue.”
c) Submit a final report reviewed by the auditor after the fulfillment of the commitments
mentioned in the Prospectus.
(b) In exceptional circumstances, FL may change the principal purpose of the issue subject to passing
of special resolution and offering an exit opportunity to dissenting shareholders who have not
agreed to the change in principal purpose of the issue as disclosed in the Prospectus.
The mechanism for an exit offer opportunity shall be as under:
a. EOGM notice in respect of any change in the principal purpose of the issue as disclosed in the
prospectus shall be given along with draft special resolution as required under the provisions of
Companies Act, 2017.
b. Subject to approval of special resolution as defined in the Companies Act, 2017, the
shareholders who have dissented against the special resolution and conveyed their dissent to the
company secretary under intimation to PSX, shall be provided an opportunity to exit by
offering a price per share, by the sponsors of the issuer that shall be highest of the following:
 Intrinsic value based on the latest available audited accounts;
 Weighted average closing price for last six preceding months
 offer price at which the shares were subscribed through IPO.
The exit offer shall be executed by the sponsors with in a period of thirty days from the date of
passing of special resolution.

Answer: 7
(a) Procedure for Reverse Merger:
The following clauses shall be applicable on the Listed Company in relation to Reverse Merger
transactions, for ensuring timely disclosure of information and compliance with all applicable
requirements of this Chapter.
Every Listed Company, in order to enable the Exchange to determine its status as Listed Shell
Company, shall intimate the Exchange immediately upon approval by its board of directors to
consider the proposal received from Operating Unlisted Company for merger.
The Listed Company shall also obtain from the Operating Unlisted Company and submit to the
Exchange, confirmation that the Operating Unlisted Company has received the approval by the
board of directors of the Listed Company to initiate merger negotiations with the Operating
Unlisted Company.
The Exchange may require the Listed Company to provide any additional information. The
 Advanced Corporate Laws & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Exchange shall communicate in writing, within a maximum period of 15 days from the date of
receipt of such intimation, if the proposed transaction is a Reverse Merger or otherwise.
In case the Exchange confirms that the proposed transaction is a Reverse Merger, the Listed Shell
Company shall ensure compliance with all applicable requirements as provided for herein below.
(b) Conditions to be fulfilled for reverse Merger:
The Listed Shell Company shall submit to the Exchange the information / documents as mentioned
in Appendix-2 to this Chapter and give an undertaking on non-judicial stamp paper confirming that
the proposed Surviving Company shall fulfill the following conditions:
(a) The minimum paid-up capital shall not be less than Rs. 200 million;
(b) The minimum Free Float shall not be less than 25% of the issued share capital and 5 million
Free Float shares within one year from the date of approval of the scheme of arrangement by
the competent authority;
(c) The Promoters/ Sponsors/ Controlling Directors / Majority Shareholders are / were not also the
Promoters/ Sponsors/ Controlling Directors / Majority Shareholders in a:
i. Listed Company, which is in the Defaulters’ Segment; or
ii. Listed Company, which was delisted due to noncompliance of any applicable provision of
PSX Regulations within the past five years; or
iii. Corporate Brokerage House whose TRE Certificate has been cancelled/forfeited, or
declared defaulter by the Exchange due to noncompliance of any applicable rules,
regulations, notices, procedures, guidelines etc.
(d) It is not an associated company or a wholly owned company of any other Listed Company,
which is in the Defaulters’ Segment or trading in its shares is suspended due to violation/non-
compliance of laws.
(e) There are no overdue loan/payments to any financial institution against the CEO/Promoters/
Sponsors/ Directors/ Major Shareholders of the Surviving Company either in their individual
capacity or as CEO, Director, Partner or Owner in any Company / Firm / Sole Proprietorship;
(f) There are no overdue loan/payments to any financial institution against the Operating
Unlisted Company, its associated / group companies and undertakings;
(g) None of its Sponsors, Major Shareholders, Directors and Management, Associated
Company/Entity has been declared involved in any fraudulent activity by the Commission, SBP
or any other investigation agency or court of law;
(h) None of the Sponsors, Major Shareholders, Directors and Management, Associated
Company/Entity of the Listed Shell Company has been declared involved in any fraudulent
activity by the Commission, SBP or any other investigation agency or court of law;
(i) The shares of sponsors shall be inducted into CDS in freeze status for a period of not less than
three years and the sponsors shall not be allowed to sell their shares during this period;
(j) It shall ensure compliance with all requirements of the PSX Regulations.
Provided that the condition (d), (e) and (f) shall not apply to nominee directors of the Government
and Financial Institutions.
 Advanced Corporate Laws & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Answer: 8
There are five fundamental principles of ethics for chartered accountants:
a) Integrity – to be straightforward and honest in all professional and business relationships.
b) Objectivity – not to compromise professional or business judgments because of bias, conflict
of interest or undue influence of others.
c) Professional Competence and Due Care – to:
Attain and maintain professional knowledge and skill at the level required to ensure that a client
or employing organization receives competent professional service, based on current technical
and professional standards and relevant legislation; and
Act diligently and in accordance with applicable technical and professional standards.
d) Confidentiality – to respect the confidentiality of information acquired as a result of
professional and business relationships.
e) Professional Behavior – to comply with relevant laws and regulations and avoid any conduct
that the chartered accountant knows or should know might discredit the profession.
Answer: 9 (a)
 Advanced Corporate Laws & Practices
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Certified Finance and Accounting Professional Stage – Mock Summer 2022
(b) Answer can be given using following provisions:
i) TPL may file a petition in the Court for an order of mediation, which shall be supported by a
 plan of rehabilitation,
 statement of affairs and
 special resolution of the debtor approving the plan of rehabilitation.
ii) For due discharge of his functions, a mediator shall have the following powers.
 to hold separate meetings of shareholders of the debtor and creditors or different classes of
creditors;
 to invite, scrutinize and determine claims and interest against the debtor;
 to determine security interests created over the debtor’s assets;
 to determine the debtor’s assets available for satisfaction of the claims of the creditors;
 to carry out valuation of the assets of the debtor through professional experts approved by
the State Bank; and
 any other power specified by court.

(The End)
 The Professionals’ Academy of Commerce
Pakistan’s Leading Accountancy Institute

Certified Finance and Accounting Professional Stage Mock Examinations

27 May, 2022
3 hours – 100 marks
Additional reading time - 15 minutes

Strategy and Performance Measurement

Q.1 For each of the following scenarios identify the force of competition that may have an impact on industry
profitability. Clearly comment on the strength of the force mentioned along with supported arguments:
a. Libaas is a leading apparel manufacturer in textile industry that is dominated by four major players. The
aggregate share of the market acquired by these players is over 95%. Due to the current socio-economic
situation in the country, the demand of high-end apparel is significantly declining, and it has become
challenging for the competitors to maintain their market position.
b. ‘We Care’ and ‘Lifeline’ are two pharmaceutical companies engaged in the manufacture of medicines of
treatment of a chronic disease. The companies have spent substantive R&D costs and the medicines
produced by these companies are highly effective. Due to ongoing pandemic in the world, demand for
healthcare products have already increased and pharma companies are enjoying hefty profits.
c. Carrefour is a leading large scale retail company that targets consumers and small retailers. Different fast
moving consumer goods companies approach Carrefour for shelf space and want their product to be
displayed at the outlet because of high customer traffic
d. In December 2019 world was hit by a global pandemic Covid-19 that affected the aviation industry across
the world. Airline companies operating internationally and domestically have to restrict their flight
operations and strict travel SOPs were implemented across the world. (08)

Q.2 Ahmed Textile Ltd (ATL) is a leading apparel manufacturing company in Pakistan. The firm was started in
1961by Sheikh Ibrahim. Initially the firm was engaged in manufacturing of grey cloth. Over the course of
almost 60 years, the firm has integrated vertically and now it is operating its own processing plant, finishing,
stitching units. The new CEO is deciding to launch company operated outlets with the name Riwayat. In an
effort to differentiate this retail brand from others, the CEO is thinking of following initiatives:
 Apart from standardized apparel product, offer customized fabric designing service in-store. Customer can
choose from a variety of fabric types, designs, stitching styles. The desired apparel will be manufactured
and provided to customers within seven days of placing the order
 In-store food corner will be offered where customers can sit, relax and order some snacks during the
shopping spree.
 In-car buying option will also be available for the customers who are uncomfortable with the crowded
places. Customers will be served catalogs in cars; the selected products will be fetched from the store and
customers can make final decision by paying in cash or through card in the comfort of their cars.
 Money back guarantee will be given. No apparel store in Pakistan offers money back guarantee. If a
customer returns within seven days of purchase of the product, it will be completely refunded without any
penalty (provided the fabric is not spoiled or washed).
 Drone-delivery system to be launched for the customers ordering goods online.
Based on the scenario above, answer the following questions:
a. Highlight primary value chain activities of Riwayat. (05)
b. From the perspective of business strategy, comment on the type of strategy adopted by ATL for Riwayat.
Also, how can firm leverage on this strategy to minimize threat from the competitors? (08)
c. Comment on at least two risks associated with these strategies. How these risks can have a negative
impact on performance of the firm (04)
 Strategy and Performance Measurement |Page 2 of 3
Q.3 (a) Aleem-Fateen Education Institute (AFE) is a leading training organization that offers training services to
business organizations across the world. AFE is known for its state-of-the-art training methodologies focusing
on building business skill and technical acumen in the employees of its clients and the cliental of AFE is very
much satisfied with their service. Recently two master trainers have left AFE and the CEO of AFE is in an
urgency of hiring seasoned trainers from the training & development market. You are managing a recruitment
center in heart of the city providing recruitment services to the clients. CEO of AFE has approached you
through a reference and have asked you to recruit master trainers for them. Not to give up this opportunity,
you have committed to come up with a potential pool of excellent candidate qualifying for master trainer
position within fifteen days.
Required:
a. Develop a recruitment drive clearly focusing on the process of recruitment you will be engaged in to
recruit master trainer for AFE. (06)
b. Develop a job description for an accountancy trainer. The description should clearly mention all required
components of an effective job description (06)
c. Discuss key benefits of effective recruitment. (04)
(b) Zymal Farooq (ZF) is a marketing manager in a leading fast-food restaurant in Lahore operating with the
name Grab ‘n Go. Due to increased competition, ZF is deciding to revamp the product line. Currently, the
restaurant is offering a variety of burgers, sandwiches, pizzas and pasta. ZF has a called a meeting of
marketing department to discuss the potential of expanding the product line and target other segments of the
customers who are interested in desi and continental cuisines. Though ZF is very enthusiastic about the launch
of new product line but the marketing team is skeptical about the success of expanded product line as it will
require a complete rebranding of the restaurant.
Required:
a. From the perspective of marketing, highlight some key strategies other than product line expansion that
ZF could think about to sustain the market position of Grab ‘n Go. (06)
b. What are the various ways to segment a market? How Gran ‘n Go has segmented its market for its fast-
food business. Which new segments will be added if the restaurant expands its product line? (04)
c. If Grab ‘n Go wants to minimize its risk, what option does it have to expand the business in other cities of
the country? (05)

Q.4 Anees Ltd is a leading chemical factory in the country providing chemicals. They offer a full range industrial
chemicals to various manufacturers. Though the company is performing financially good, CEO is concerned
about the environmental and social hazards that may be an outcome of the firm’s operations. He has devised a
team from various departments to come up with an effective performance measurement mechanism. You are
also a part of the team that has been setup by the CEO. You have suggested the team members to use Building
Block model by Fitzgerald and Moon to highlight the key dimensions of performance.
Required:
a. Explain the concept of financial and non-financial performance measurement (04)
b. What key dimensions of building block model will be used to measure the performance of the chemical
factory. Also suggest at least one key performance indicator for each performance measure. (08)
c. The CEO is of the view that firm should also adopt a comprehensive reporting mechanism to improve its
market repute. Comment on the use of integrated reporting model as a performance reporting tool. What
are some of the benefits and drawbacks of using integrated reporting? (08)

Q.5 Global Tech Ltd is providing IT solutions to local and international clients. The CTO has recently attended an
international conference and was really impressed with the level of IT standards being used by the tech firms
abroad. After his return, he has advised his team to come with a proposal of implementing an international IT
control standard for enhanced efficiency of the IT processes. Usman is a part of the team who is going to
present the implementation plan of IT control standard. Usman has decided to come with a recommendation
of implementing Control Objectives for Information and related Technologies (COBIT).
Required:
a. Briefly discuss the purpose of COBIT. (04)
b. What are the key components of COBIT that firms should be focused to effectively control the IT
processes? (07)
 Strategy and Performance Measurement |Page 3 of 3
Q.6 a. Briefly discuss the key principles of corporate social responsibility that must be focused by a manufacturing
firm engaged in shoe manufacturing. (04)
b. You are working as an auditor in a professional firm. Recently you have been deputed to a client where one of
the office administrators have approached you and offered you some gifts. He subtly asked to fabricate some
of the financial information for taxation purpose. What stages of ethical model you will go through to
minimize the threat of this ethical issue. (07)
c. Briefly discuss mirror test. (02)

(The End)
 Strategy and Performance Measurement
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022

Answer: 1
a. Competitive rivalry: Libaas is operating in an industry dominated by four major players catering
95% aggregate market share. The competitive rivalry in this industry is strong. Competition within
an industry is obviously also determined by the rivalry between the competitors. Strong competition
forces rival firms to offer their products to customers at a low price (relative to the product quality)
and this keeps profitability fairly low.
Porter suggested that competitor rivalry might be strong in any of the following circumstances:
 Rival firms are roughly the same size
 When there are many competitors
 When there is slow growth in demand
 When rival products are undifferentiated
 When cost of withdrawal from the industry is high (shut down cost)
Threat of new entrant: Pharmaceutical industry in which ‘We care’ and ‘Life Line’ are working
has low threat of new entrants because of high entry barriers. The entry barriers that may restrict the
new entrants from entering this industry include:
I. Capital investment
II. Know-how
III. Time to become established
IV. Government regulation
V. Customers’ switching cost
b. Bargaining power of customers: Carrefour is a business buyer of many fast moving consumer
goods companies that are approaching Carrefour for shelf space. In this case bargaining power of
customer (carrefour) would be high based on following conditions:
I. when the volume of their purchases is high relative to the size of the supplier (Hyperstar
buying from a small Fast Moving Consumer Goods company)
II. when the products of rival suppliers are largely the same (‘undifferentiated’) (Olpers and
Milkpak)
III. when the costs of switching from one supplier to another are low (Hyperstar can switch to any
supplier for FMCG products)
IV. when the cost of a purchased item is a significant proportion of the buyer’s total costs (Bulk
buying)
V. when the profits of the buyer are low
VI. when the buyer has full information about suppliers and prices.
c. Bargaining power of suppliers: The airline industry has been hit badly by global pandemic
thereby reducing the bargaining power of suppliers such as fuel and airplane manufacturers based
on the following conditions:
I. Fewer number of airline companies operating flights
II. Restriction on flight operations due to strict SOPs
III. Overall global lockdown restricting customers’ movements

Answer: 2 (a)
The primary value chain of Riwayat includes the following activities:
1. Inbound logistics
 Strategy and Performance Measurement
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Certified Finance and Accounting Professional Stage – Mock Summer 2022
a. Ordering of raw materials
b. Storage of raw materials till they are needed for production
2. Operations
a. Manufacture of standardized apparels for the customers
b. Manufacture of customized apparels for the customers
3. Outbound logistics
a. Drone delivery to customers
b. Operating stores in various parts of the country
c. In-car buying option
4. Marketing and sales
a. Use of social media to promote the brand
b. Effective use of marketing mix (7Ps of marketing)
5. Services
a. Money back guarantee
b. In-store restaurant
c. Customer feedback
Answer: 2 (b)
Based on the various options the CEO is considering to implement, ATL is considering
Differentiation strategy for Riwayat. Differentiation means making a product different from rival
products in a way that customers can recognize. Customers might be willing to pay a higher price
for the product, because they value its different features. Companies pursuing a differentiation
strategy need to offer products and services that are perceived as better as or more suitable than
those of their competitors. To deliver better products and services usually requires investment and
innovation.
Companies with a differentiation strategy cannot ignore cost. They should keep costs under control
and try to reduce costs, so that they can offer more value to customers and retain their competitive
advantage. However, they are not trying to be the least-cost producers.
Differentiation strategy minimizes the risk of competition as the companies adopting innovation sin
differentiation takes first mover advantage in the market. By adopting all the mentioned innovations
ATL will have additional advantage over the competitors in terms of superior customer service and
advanced technology.
Answer: 2 (c)
Following risks are inevitable for ATL if they go for these differentiation strategies:
Market risk
Market risk caters for demand and supply risk for a business. Even though ATL use these unique
and differentiation strategies, there is a possibility that customers may not raise the expected
demand, thus resulting in high losses for the customers.
Technological risk
Technological advancements need huge capital at part of the company. In this case, ATL will spend
a lot on drone delivery systems. There is a possibility that this system does not work at the required
level of service, thus resulting in huge financial loss for the company.
 Strategy and Performance Measurement
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Certified Finance and Accounting Professional Stage – Mock Summer 2022
Answer: 3
a. AFE will go through following steps in their recruitment drive:

Job analysis – Job description and person specification

The overall purpose of job analysis is to document the requirements of a job and the work
performed within it. Job analysis is performed as part of human resources management which
includes defining the scope of jobs, writing job descriptions, holding performance appraisals,
selecting and promoting staff, performing a training needs assessment and as the basis for
compensation and organisational planning.
The purpose of a job analysis is to:

 produce a detailed specification of the job (a ‘job description’); and

 produce a specification of the qualities needed from the individual who will do the job (a
‘person specification’).
Advertising the vacancy
Jobs must be brought to the attention of individuals who might want to apply for them. Jobs can be
advertised internally o(within the organization) or externally.
Methods of advertising the vacancies
The methods used to advertise job vacancies should depend on:

 whether the vacancies are advertised internally or externally; and

 the nature of the job or jobs.
Jobs can be using various media as discussed below in respective section.
Application form
Applicants for a job are often asked to fill in a job application form. This is usually a standard
application form, used by an organisation for all its job vacancies. Application form can ask for
specific details like name, address, experience, qualification, previous employer and social interests
etc.
 Strategy and Performance Measurement
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Certified Finance and Accounting Professional Stage – Mock Summer 2022
Reference
On a job application form, applicants for a job are often asked to provide the name and address of
one or two ‘referees’. A reference is usually in a form of a letter from the referee. Alternatively, the
referee might be asked to complete a special questionnaire.
b. A typical job description for an accountancy trainer will have following components:
 the job title: Trainer (Accountancy modules)
 the date the job description was prepared: May 20 20XX
 the name of the department or section in which the job is located, and/or the physical location
of the job: Academics department
 the relationship of the job to other jobs in the organisation structure: in particular:
 Reporting to CEO
 3 junior trainers reporting to Accountancy module trainer
 is the job a part of a team, and if so, what is the size of the team? Part of a trainers’ team to
offer complete training solutions
 the purpose of the job, and the objectives of the job in relation to the overall objectives of the
department or organization: Equipping the trainees with state-of-the-art tools and techniques
 the tasks associated with the job:
 providing trainings to candidates based on predefined modules
 ensuring that all requisites of training modules are covered
 ensuring that participants are satisfied with the training module
 the responsibilities associated with the job:
 continuous development and hands-on-practice on advanced learning tools and
techniques
 continuously updating the learning modules
 alliance with other trainers to ensure coherence in training process
 the accountability of the job holder: Accountable to CEO
 Competitive market-based salary
 conditions of employment – 9 – 5 working hours with frequent travelling
 The candidate must have:
 A professional qualification in accounting (CA/ACCA/CFA)
 Must possess 5 years’ experience in professional training
 Must have effective communication skills
c.
a. Enhanced productivity of the organization
b. Greater customer satisfaction
c. Increased employee satisfaction
d. Increased repute of the organization
e. Positive brand image of the employer
f. Increased employee retention
 Strategy and Performance Measurement
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Certified Finance and Accounting Professional Stage – Mock Summer 2022
Answer: 3 (b)
a. Grab n Go can use following strategies to sustain their market position:
Market penetration strategy
A market penetration strategy is sometimes called a ‘protect and build’ strategy. With a market
penetration strategy, an entity seeks to sell more of its current products in its existing markets. This
strategy is a sensible choice in a market that is growing fast. With fast growth, all the companies
competing in the same market can expect to benefit from the rising sales demand.
A market penetration strategy is more difficult to implement when the market has reached maturity
or is growing only slowly.
Kotler suggested that market penetration strategy can be successful in three ways:
 Persuade existing customers to use more of the product or service, and so buy more.
 Persuade individuals who have not bought the product in the past to start buying and using the
product. Marketing tactics for attracting new users might include advertising or special
promotional offers
 Persuade individuals to switch from buying the products of competitors. This is a competitive
strategy based on winning a bigger market share.
Market development strategy
Market development involves opening up new markets for existing products. Kotler suggested that
there are two ways of pursuing this strategy:
Market can be developed:
 Geographically (The entity can start to sell its products in new geographical markets)
 Demographically (The entity can try to attract customers in new market segments, by offering
slightly differentiated versions of its existing products, or by making them available through
different distribution channels.)
b. A key part of developing the marketing strategy is to understand which market segments
are being targeted. Segmentation is a process of breaking down the whole market in
smaller portions of alike characteristics such as:
a. Location
b. Income group
c. Age
d. Gender
e. Education
f. Buying pattern
If Grab n Go expand the product line, they can add new income classes to their existing segments
by offering either low priced products to low end of the market or high end products to high end of
the market.
c. FranchisingSome business entities have been able to grow through franchising. This is
another form of collaboration. The basic idea of a franchise is that a company develops a
product with the following features:
 It is a standard product (or range of products), delivered to customers in a standard way.
 It has brand recognition, achieved through advertising and other sales promotion.
 Systems for delivering the product to customers are standardized (using standard equipment,
and standard work practices.
 Strategy and Performance Measurement
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Certified Finance and Accounting Professional Stage – Mock Summer 2022
 Customers want to buy it.
The most well-known examples of franchise operations are some of the fast-food restaurant chains,
such as McDonalds. The company that originates the product, the franchisor, protects its patent
rights or intellectual property rights over the product. It then sells the concept to franchisees that
pay for the right to open their own store and sell the branded product.
 The franchisor supplies the product ‘design’ and the right to sell the product. It also provides a
centralized marketing service, which includes extensive advertising and brand promotion. It
also supplies other support services, such as business advice to franchisees.
 The franchisee pays for the franchise, and in addition pays a royalty based on the value of its
sales or the size of its profits.
Strategic alliances
A strategic alliance is an arrangement in which a number of separate companies share their
resources and activities to pursue a joint strategy. By collaborating, all the companies in the alliance
are able to offer a better product or service to their customers.
Examples of strategic alliances are in the airline industry where groups of airlines might form
alliances in order to offer travelers a better selection of routes and facilities than any single airline
could offer on its own.
Firms can form promotional alliances to market their brands collectively that complement each
other. For example, Nestle and Unilever can form a promotional alliance by offering Everyday milk
powder with Lipton tea at a discounted price.

Answer: 4 (a)
a. A performance measurement is a regular financial and non-financial analysis of an organization that
indicates how well an organization is achieving its objectives. Performance is measured for all
aspects of business such as:
b. Marketing
c. Finance
d. Production
e. HR
f. Sales
g. Strategy and strategic decision
Performance measures can be:
a. Financial
b. Non-financial
Answer: 4 (b)
Dimensions of performance
Research by Fitzgerald and others (1993) and by Fitzgerald and Moon (1996) concluded that there
are six aspects to performance measurement that link performance to corporate strategy. These are:
 profit (financial performance)
 competitiveness
 quality
 resource utilization
 flexibility
 innovation.
 Strategy and Performance Measurement
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Dimension (CSFs) Measures (KPIs)
Financial performance Profitability, performance, growth in profits
Profit/sales margins.
Note: Return on capital employed is possibly not so relevant in a service industry,
where the company employs fairly small amounts of capital.
Competitiveness Growth in sales, retention rate for customers (or percentage of customers who buy
regularly: ‘repeat sales’), success rate in converting enquiries into sales, possibly
market share, although this may be difficult to measure.
Service quality Number of complaints, whether the rate of complaints is increasing or decreasing
customer satisfaction, as revealed by customer opinion Surveys, Number of errors
discovered
Possibly the mix of different types of work done by Employees, possibly the
Flexibility
speed in responding to customer requests
Resource Efficiency/productivity measures utilization, Utilisation rates: percentage of
Utilisation available time utilised in‘productive’ activities
Number of new services offered, percentage of sales income that comes from
Innovation
services introduced in the last one or two years
Answer: (c)
Businesses need a reporting environment that allows them to explain how their strategy drives
performance and leads to the creation of value over time. This should make it easier to attract
financial capital for investment.
An integrated report is a concise communication about how an organization’s strategy, governance,
performance and prospects, in the context of its external environment, lead to the creation of value
in the short, medium and long term.
International Integrated Reporting Council
The Johannesburg Stock Exchange (JSE) has mandated integrated reporting through its listing
requirements. The King Report (2009) required South African companies to integrate sustainability
reporting with traditional financial reporting. This is the first national attempt to enforce integrated
reporting across all listed companies.
International Integrated Reporting Council (IIRC)
The International Integrated Reporting Council (IIRC) is an influential global coalition of
regulators, investors, companies, standard setters, the accounting profession and NGOs who share
the view that communication about value creation should be the next step in the evolution of
corporate reporting.
The aims of the IIRC are as follows:

 to improve the quality of information available to providers of financial capital;

 to promote a more cohesive and efficient approach to corporate reporting;
 to enhance accountability and stewardship; and
 to support integrated thinking, decision-making and actions that focus on the creation of value
over the short, medium and long term
1.1. The IIRC framework
The IIRC has developed and published The International <IR> Framework to provide a foundation
for the development of integrated reports. Note that the symbol <IR> is used by the IIRC as a
designation for integrated reports and reporting.
 Strategy and Performance Measurement
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Certified Finance and Accounting Professional Stage – Mock Summer 2022
Using the framework: An integrated report should be a designated, identifiable communication.
Framework should apply all the requirements identified in bold unless:
 the unavailability of reliable information or specific legal prohibitions results in an inability to
disclose material information; or
 disclosure of material information would cause significant competitive harm.
In the case of the unavailability of reliable information or specific legal prohibitions, an integrated
report should:

 indicate the nature of the information that has been omitted;;

 explain the reason why it has been omitted; and
 in the case of the unavailability of data, identify the steps being taken to obtain the information
and the expected time frame for doing so.
Benefits: Benefits of integrated reporting include the following:

 Improved reputation through greater transparency leading to better access to capital.

 Better decision-making through improved resource allocation and enhanced risk management.
 Greater trust and engagement with stakeholders due to greater availability of relevant and
useful information.
 Improved governance and stewardship given a focus on longer timeframe and the impact on
common resources.

Answer: 5 (a)
Purpose of COBIT
The purpose of COBIT is to provide management and business process owners with an information
technology (IT) governance model that helps in understanding and managing the risks associated
with IT. COBIT helps to bridge the gaps between business risks, control needs and technical issues.
It is a control model to meet the needs of IT governance and ensure the integrity of information and
information system.
Answer: 5 (b)
COBIT comprises six specific components:
 Management Guidelines;
 Executive Summary;
 Framework;
 Control Objectives;
 Audit Guidelines; and
 Implementation Tool Set.
Management Guidelines
To ensure a successful enterprise, one has to effectively manage the union between business
processes and information systems. The Management Guidelines are composed of:
 Maturity models, to help determine the stages and expectation levels of control and compare
them against industry norms
 Critical Success Factors, to identify the most important actions for achieving control over the
IT processes
 Strategy and Performance Measurement
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022

 Key Goal Indicators, to define target levels of performance; and Key Performance Indicators,
to measure whether an IT control process is meeting its objective.
These Management Guidelines will help answer the questions of immediate concern to all those
who have a stake in enterprise success.
Executive Summary
Sound business decisions are based on timely, relevant and concise information. Specifically
designed for time pressed senior executives and managers, COBIT includes an executive overview
which provides thorough awareness and understanding of COBIT’s key concepts and principles.
Also included is a synopsis of the Framework providing a more detailed understanding of the
concepts and principles, while identifying COBIT’s four domains (Planning & Organisation,
Acquisition & Implementation, Delivery and Support, and Monitoring) and 34 IT processes.
Framework
A successful organisation is built on a solid framework of data and information. The Framework
explains how IT processes deliver the information that the business requires to achieve its
objectives. This delivery is controlled through 34 high-level control objectives, one for each IT
process, contained in the four domains. The Framework identifies which of the seven information
criteria (effectiveness, efficiency, confidentiality, integrity, availability, compliance and reliability),
as well as which IT resources (people, applications, technology, facilities and data) are important
for the IT processes to fully support the business objective.
Control Objectives
The key to maintaining profitability in a technologically changing environment is how well control
is maintained. COBIT’s Control Objectives provide the critical insight needed to delineate a clear
policy and good practice for Information Technology controls. Included are the statements of
desired results or purposes to be achieved by implementing the specific and detailed control
objectives throughout the 34 Information Technology processes.
Audit Guidelines
To achieve desired goals and objectives one has to constantly and consistently audit one’s
procedures. Audit Guidelines outline and suggest actual activities to be performed corresponding to
each of the 34 high level IT control objectives, while substantiating the risk of control objectives
not being met. Audit Guidelines are an invaluable tool for information system auditors in providing
management assurance and/ or advice for improvement.
Implementation Tool Set
Implementation Tool Set contains:

 Management Awareness and IT Control Diagnostics;

 Implementation Guide FAQs;
 Case studies from organisations currently using COBIT; and
 Slide presentations that can be used to introduce COBIT into organisations.
The Tool Set is designed to facilitate the implementation of COBIT, relate lessons learned from
organisations that quickly and successfully applied COBIT in their work environments, and lead
management to ask about each COBIT process: Is this domain important for our business
objectives? Is it well performed? Who does it and who is accountable? Are the processes and
control formalised?
 Strategy and Performance Measurement
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Answer: 6 (a)
Corporate social responsibility has five main aspects.
1. A company should operate in an ethical way, and with integrity. A company should have a
recognized code of ethical behavior
2. A company should treat its employees fairly and with respect. The fair treatment of employees
can be assessed by the company’s employment policies.
3. A company should demonstrate respect for basic human rights. For example, it should not
tolerate child labor.
4. A company should be a responsible citizen in its community. Responsibility to the community
might be shown in the form of investing in local communities, such as local schools or
hospitals.
5. A company should do what it can to sustain the environment for future generations. This could
take the form of:
a. reducing pollution of the air, land or rivers and seas
b. developing a sustainable business, whereby all the resources used by the company are
replaced
c. cutting down the use of non-renewable (and polluting) energy resources such as oil and
coal and increasing the use of renewable energy sources (water, wind)
d. re-cycling of waste materials.

Answer: 6 (b)
1.1. A model based on threats and safeguards
ICAP’s Code of Ethics sets out a model for dealing with ethical conflicts, and using judgement
to decide how the conflict should be resolved is set out below. The model is based on
recognizing threats to compliance with the fundamental principles, and assessing safeguards to
eliminate the threats.
The model is in several logical stages, as follows.
 Stage 1. Recognize and define the ethical issues.
 Stage 2. Identify the threats to compliance.
 Stage 3. Assess the significance of the threats.
 Stage 4. If the threats are ‘not insignificant’, consider the additional safeguards that could
be used.
 Stage 5. Re-assess the threats to compliance after additional safeguards. Do the additional
safeguards eliminate the risk or reduce it to an insignificant level?
 Stage 6. Make the decision about what to do.
Define the issues: Accountants are expected to identify potential threats to their compliance
with the fundamental ethical principles. In order to do this, it might be necessary to establish
the facts. An accountant might suspect that an ethical issue exists, but cannot be sure because
he does not have enough facts to inform him about the situation. In this scenario, the issue is
the acceptance of gifts to fabricate some financial info.
Identify the threats to compliance with ethical principles: Having established the facts and
defined the ethical issues, the accountant must next think about his own involvement. The
concern for the accountant should be whether his compliance with the fundamental ethical
principles is under threat, and if so, what is the nature of the threat. In this scenario, self-
interest threat is prevalent.
 Strategy and Performance Measurement
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Assessing the significance of the threats: The next stage is to identify the significance of the
threats to compliance with the fundamental ethical principles. If existing controls are sufficient
to eliminate the risk of non-compliance, or if the existing controls are sufficient to reduce the
risk to an insignificant level, no further action is needed.
Introducing safeguards: Safeguards, or additional safeguards, can be introduced to reduce
the threats to compliance with the fundamental ethical principles. These threats must be
eliminated entirely or reduced to an insignificant level.
Taking action: Introducing additional safeguards might be sufficient to deal with the problem.
However, if the threats to compliance with the fundamental ethical principles cannot be
eliminated or reduced to an insignificant level, more extreme measures are necessary.
 For accountants in public practice, an extreme measure is to decline to work for
a particular client, or to cease working for a client.
 For accountants working in industry and commerce, an extreme measure would be
to become a ‘whistleblower‘, and to report concerns to an appropriate authority. In
an extreme case, the appropriate action might be for the accountant to resign from
his or her job.
Answer: 6 (c)
The Mirror test
To carry out a mirror test, you have to answer a basic question about the ethics of a course of
action. If you choose a course of action, are you able to look yourself in the mirror and see a person
who has acted in a moral and ethical way. Can you justify the decision you have taken from an
ethical perspective?
Three questions that you can ask when carrying out the mirror test are as follows.
For the course of action you have chosen, the three questions are:
 Is it legal? If it is not legal, you should not be doing it.
 What will other people think? Think about the opinion of people whose views matter to you,
such as close family members (a parent, spouse, or close friend) or the media. Are you
satisfied with the effect of your action on these people?
 Even if the action is legal, it is ethically correct? A problem for accountants is often that an
action is legal (or not illegal) but is nevertheless unethical and should be avoided.

(The End)
 The Professionals’ Academy of Commerce
Pakistan’s Leading Accountancy Institute

Certified Finance and Accounting Professional Stage Mock Examinations

24 May, 2022
3 hours – 100 marks
Additional reading time - 15 minutes

Business Finance Decisions

Q.1 JKT is a long-established, large and successful travel company based in Lahore and is listed on the Pakistan
Stock Exchange. JKT provides travel services to different sectors of the travel and holiday market.
JKT's recent strategy has been to focus on growing its corporate travel services division. However, the board
of directors has become increasingly concerned about a forecasted decline in JKT growth. In response, the
CEO believes it is time to consider further acquisitions to help JKT achieve its strategic objective of being
the market leader in the package, corporate and luxury travel markets.
The JKT Board of Directors has requested your assistance in valuing the potential acquisition of Safari
Adventure plc and advising on how it should proceed.
As a result, the board of directors is considering purchasing two safari parks in Malawi (an East African
country) and one safari park in Botswana (a South African country) operated by a UK company, Safari
Adventure plc (Safari).
JKT’s share capital consists of 60 million shares which are currently trading at Rs. 500 per share.
Additionally, JKT has outstanding loans of Rs. 20,000 million which are due for repayment in December
2024.
The directors of Safari have submitted a letter to the JKT Board of Directors stating that their shareholders
are likely to accept an offer of Rs. 9,000 million for 100% equity in Safari Adventure plc. This offer price
represents a 20% premium on Safari’s current London Stock Exchange share price of £1.50 per share.
Safari is currently ungeared and its paid-up capital consists of 20 million shares.
In order to determine the combined value of JKT and Safari Adventure plc. Here are our forecast of free cash
flows (FCF) which are stated after all taxes for both companies based on our own projections for JKT, and
from information supplied by Safari Adventure plc in their offer for sale.

Year to Year to Year to Year to Year to

30-Jun-23 30-Jun-24 30-Jun-25 30-Jun-26 30-Jun-27
JKT Rs. in million 2,500 2,700 2,900 3,000 3,100
Safari £ in million 5.0 5.2 5.4 5.5 5.5
 Additional profit after tax of Rs. 150 million per annum will be generated in 2019, increasing by 6%
onwards for next four years.
 Surplus land at one of the Malawi safari parks can be sold to a local housing developer for equivalent to
Rs. 500 million at the end of 2023 without impacting the forecasted free cash flows. This land is not
currently used by the guests of the Safari park.
 Combine Cashflows after 5 years will grow with 40% of the average growth of JKT free cashflows
during the first five years.
 JKT's post-tax weighted average cost of capital will remain at 9% following the acquisition of Safari
Adventure plc.
 The existing exchange rate of £1: Rs. 250 is not expected to change
There are two possible financing options.
Option 1 – Borrow and acquire with cash
We could finance the acquisition with a further bank loan at a post-tax interest rate of 6% which is
comparable to our existing bank loans.
 Business Finance Decisions |Page 2 of 4
The directors of JKT have expressed some concern about the current level of gearing, however, Directors
believe that the additional operating profit generated by the safari parks will far exceed the cash required to
service the additional debt finance.
Option 2 – Acquire with a share for share exchange
An alternative is to acquire Safari Adventure plc by offering new JKT shares instead of cash. An investment
bank has initially advised that based on current equity values, an offer of 1 new JKT share for each existing
Safari Adventure plc share would be acceptable to the shareholders of Safari Adventure plc.
JKT Safari Adventure
June 2018
PAT Rs, £ 2200 4.4
Required:
(a) Determine the value of the new combined group after the acquisition and the maximum price that JKT
may pay. Also advise the Board of Directors of JKT whether or not to proceed with the offer price of
Rs. 9,000 million.
Note: All workings should be done to the nearest Rs. in million. State and explain any assumptions.
(17)
(b) Assuming the offer of Rs. 9,000 million is accepted, determine the impact on control, gearing, and
earnings per share if the acquisition is funded with new debt or by the issuance of shares, and give
appropriate recommendations to the JKT's Board of Directors. (13)
Note: Ignore tax

Q.2 Petro Electronic Manufacturing Ltd (PEM) is a very large company with its head office in Karachi and is
listed on the Pakistan Stock Exchange. PEM manufactures a wide range of industrial computer and electronic
technologies.
The FZ Technology Devices, or FZT, is a new product that the company is about to launch in Malaysia and
approval has been received from the Malaysian Government.
Directors of PEM must consider whether to invest in Malaysia. The directors of PEM have provided forecast
project revenue and cost assumptions to manufacture the FZT range in Malaysia.
The following information relates to the production of the FZT in Malaysia.
The Malaysian project will require an initial investment of MYR 300 million in total, which will pay for the
cost of land and buildings (MYR 150 million) and necessary plant and machinery (MYR 150 million).
PEM will also require working capital of 20% of the forecast sales revenue for a given year, after inflation,
to be in place at the beginning of each year. The working capital will be released at the end of year 4. The
project is expected to be sold to the Malaysian Government for MYR 240 million, which comprises MYR
120 million for land and buildings and MYR 120 million for plants and machinery.
It is estimated that it will take approximately four months to complete factory set-up and labor recruitment
and training, after which production will commence. Forecast production volumes are based on construction
activity information supplied by the Malaysian Government with 15,000 units in the first year, rising to
32,000 units in the second year, 40,000 units in the third year, and 50,000 units in the final year.
The following average price, cost per unit, and total fixed costs are forecasted to apply in the first year of
operation:
 Each FZT will be sold for MYR 8,500 per unit.
 The variable cost to manufacture each FZT device will be MYR 5,000 per unit. This cost comprises
locally sourced materials, labor, and other variable costs of production but excludes accounting
depreciation relating to plant and machinery.
 Total fixed costs for the first year of production will be MYR 30 million.
From year 2 onwards, revenue is expected to increase by Malaysia's rate of inflation of 2% per annum, but
variable and fixed costs are expected to rise by 4% per annum due to the specialist nature of skilled labor
required which is in short supply.
The directors of PEM expect Malaysian tax to closely follow Pakistan tax rules with corporation tax of 29%
per annum and allowable initial and normal tax depreciation of 25% and 10% respectively for plant and
 Business Finance Decisions |Page 3 of 4
machinery. Land and buildings will not be eligible for tax depreciation allowances.
The current commercial borrowing rate in Pakistan is 9% but the Malaysian Government has offered PEM a
5% subsidized loan for the MYR 300 million required plus the value of the working capital required at the
beginning of the project. The Malaysian Government has agreed that it will not ask for the loan to be repaid
until year 4 on the condition that PEM undertakes to manufacture the FZT range in Malaysia for the next
four years.
PEM is listed on the Pakistan Stock Exchange with 100 million shares currently trading at Rs. 325 per share
and Rs. 15,000 million 7% corporate bond trading at a 20% premium to their nominal value. PEM's most
recently quoted equity beta is 1.87. The current risk-free rate of return is estimated at 3.1% and the market
risk premium is 5.75%.
Due to the international nature of the project, the directors estimate that the beta applicable to the project, if
it is all-equity financed, will be 0.2 more than the current all-equity financed beta (or asset beta) of PEM.
The current spot exchange rate between the Malaysian ringgit and the Pakistan rupee is MYR 0.029 per
rupee. Annual general inflation rates are currently 5% in Pakistan and 2% in Malaysia. It can be assumed
that these inflation rates will not change for the foreseeable future. All net cash flows arising from the
project will be remitted back to PEM at the end of each year.
Required:
(a) Using the APV method, evaluate whether or not PEM should undertake the project to produce the FZT
range in Malaysia by applying project acceptance criteria. (All cash flows arise at the end of the year
unless otherwise specified ) (20)
(b) Comment on the appropriateness of PEM using the APV method to evaluate the FZT project and the
other assumptions made in determining the base case NPV. (06)

Q.3 Beatle Co is an international transport operator based in Pakistan that has been invited to take over a rail
operating franchise in Walancia, where the local currency is the Walachia dollar (w$).
Beatle Co will pay w $5,000 million for the rail franchise immediately. The government has stated that
Beatle Co should make an annual income from the franchise of $600 million in each of the next three years.
At the end of the three years, the government in Walancia has offered to buy the franchise back for w$7,500
million if no other operator can be found to take over the franchise.
Today’s spot exchange rate between the Euro and Walancia is 180 Rs /w$. The predicted inflation rates are
as follows:
Year 1 2 3
Pakistan 6% 10% 15%
Walancia 12% 18% 25%
Beatle Co’s finance director (FD) has contacted its bankers with a view to arranging a currency swap, since
he believes that this will be the best way to manage financial risks associated with the franchise. The swap
would be for the initial fee paid for the franchise, with a swap of principal immediately and in three years’
time, both these swaps being at today’s spot rate. Beatle Co’s bank would charge an annual fee of 0·5% in €
for arranging the swap. Beatle Co would take 60% of any benefit of the swap before deducting bank fees,
but would then have to pay 60% of the bank fees.
Relevant borrowing rates are:
Beatle Co Counterparty
Pakistan 14·0% 15·8%
Walachia Walancia bank rate Walancia bank rate
+ 0·6% + 0·4%
In order to provide Beatle Co’s board with an alternative hedging method to consider, the FD has obtained
the following information about over-the-counter options in PKR against W$ from the company’s bank.
The exercise price quotation is in Rs/w$, premium is % of the amount hedged, translated at today’s spot rate.
Exercise price Call options Put options
145 1·8% 2·6%
155 2·8% 1·7%
Assume a discount rate of 14%.
 Business Finance Decisions |Page 4 of 4
Required:
(a) Discuss the advantages and drawbacks of using the currency swap to manage financial risks associated
with the franchise in Walancia. (06)
(b) (i) Calculate the annual percentage interest saving that Beatle Co could make from using a currency
swap, compared with borrowing directly in Walancia, demonstrating how the currency swap will
work. (04)
(ii) Evaluate, using net present value, the financial acceptability of Beatle Cooperating the rail
franchise under the terms suggested by the government of Walancia and calculate the gain or loss
in € from using the swap arrangement. (08)
(c) Calculate the results of hedging the receipt of w$7,500 million using the currency options and discuss
whether currency options would be a better method of hedging this receipt than a currency swap.
Note: It is assumed that the Spot rate predicted by PPPT will prevail at end of year three (07)

Q.4 Tanveer Co is considering an opportunity to produce an innovative component that, when fitted into motor
vehicle engines, will enable them to utilize fuel more efficiently. The component can be manufactured using
either process Alpha or process Beta.
Although this is an entirely new line of business for Tanveer Co, it is of the opinion that developing either
process over a period of four years and then selling the productions rights at the end of four years to another
company may prove lucrative.
The annual after-tax cash flows for each process are as follows:
Year 0 1 2 3 4
Process Alpha After-Tax Cashflows (PKR 000) (3800) 1220 1153 1386 3829
Process Beta after-tax Cashflows (PKR 000) (3800) 643 546 1055 5990
Tanveer Co has 10 million shares trading at Rs 1.8 each. Its BBB-rated 8% loan notes have a book value of
3.6 million and the par value is Rs 1,000 and will be redeemable in three years’ time. Tanveer Co’s capital
structure is unlikely to change significantly following the investment in either process.
The government has three bonds in issue. They all have a face or nominal value of Rs 100 and are all
redeemable at par. Taxation can be ignored on government bonds. They are of the same risk class and the
coupon on each is payable on an annual basis. Details of the bonds are as follows:
Bond Maturity Coupon Market value
1 1 Year 9% 104
2 2Year 7% 102
3 3Year 6% 98
Credit spreads, published by the credit agency, are as follows (shown in basis points):
Rating 1 Year 2 Year 3 Year
AAA 18 31 45
BBB 54 69 86
Iffi Co manufactures electronic parts for cars including the production of a component similar to the one
being considered by Tanveer Co. Iffi Co’s equity beta is 1.40, and it is estimated that the equivalent equity
beta for its other activities, excluding the component production, is 1.25. Iffi Co has 400 million shares in
issue trading at 1.20 each.
Its debt finance consists of variable rate loans redeemable in seven years. The loans paying interest at the base
rate plus 120 basis points have a current value of 96 million. It can be assumed that 80% of Iffi debt finance
and 75% of Iffi Equity finance can be attributed to other activities excluding component production. It can be
assumed that 75% of Iffi Co’s revenue is generated from other activities excluding component Production.
Both companies pay annual corporation tax at a rate of 25%. The current base rate is 3.5% and the market risk
premium is estimated at 5.8%.
Required:
Calculate the Appropriate Cost of capital to evaluate the above two projects. (13)
Calculate IRR and MIRR of both projects Alpha and Beta and based on these methods select the most
appropriate Process. (06)
(The End)
 Business Finance Decisions
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Suggested Answers

Answer: 1
Part (a)
Free cash flow valuation of a combined group
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 and onwards
JKT Ltd (Rs millions) 2,500 2,700 2,900 3,000 3,100
Safari Adventure plc
(£ millions) 5.0 5.2 5.4 5.5 5.5
Safari Adventure plc
(Rs millions) at Rs 250 : £1 1250 1300 1350 1375 1375
Revenue synergy
(Rs millions) 150 159 169 179 189
Sale of surplus land
(Rs millions) 500
Total 4,400 4,159 4,419 4,554 4,664
Perpetuity year 6 onwards
(4,664x 1.0221/0.09-0.0221) 70,207
Discount Factor 9% 0.917 0.842 0.772 0.708 0.650 0.650
Present Value (PV) 4,035 3,502 3,411 3,224 3,032 45,634

Total Market Capitalization for the 62,838 The total PV represents the value of
combined group of JKT & Safari Equity and the value of debt in the new combined
group
Less: existing JKT loans (20,000) The loan be deducted to determine the value of
shares only
Value of Equity in new combined group 42,838
Current equity value of JKT only (30,000) 60 million shares at Rs 500 each
Maximum price for Safari Adventure plc 12,838 This represents the shareholder value if Safari was
added to JKT, so
it's the maximum JKT should pay.
Working
=(3100/2500)^(1/4) -1=5.525% x 40%=2.21%
Advice to the Board
A maximum value of Rs 12,838 million suggests the offer price of Rs 9,000 million would generate Rs 3,838
million in value on acquisition. However, this significantly relies on the following:
(1) All forecast assumptions are valid. This may not be case as:
 The assumed growth in the cash flows may be unachievable if there is a reduction in consumer
interest in safari holidays, barriers preventing the acquisition of additional safari sites or issues
increasing existing hotel capacity.
 Revenue synergy of Rs 150 million from existing JKT customers may not be realized.
 The assumption that the exchange remains constant at Rs 250 : £1 may not hold.
(2) The required return of 9% is acceptable to shareholders based on the risk of the new venture.
 Running an overseas safari parks in Africa is riskier than JKT's current operations, particularly as
JKT rely on the retaining local management experience and stabilise political conditions of Africa
region. It is likely the required return will need to be higher. It is suggested JKT must re-evaluate
the required return for this acquisition.
 Business Finance Decisions
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Suggested Answers

Conclusion
The acquisition does have its merits, and therefore we advise the acquisition is considered further subject to the
satisfactory completion of due diligence.
Marking Scheme
Total Cashflows (4 Marks)
Terminal Cashflows (2 marks)
Market capitalization (2 marks)
Loan deduction (1 mark)
Maximum price offered (2 marks)
Growth (2 marks )
Discussion (4 marks)
Part (b)
Current position JKT Safari Adventure Comments
Profit after tax in 2022
(Rs millions) 2,200 1100£4.4m x Rs 250 : £1 = Rs 660
Current value of equity (Rs millions) 30,000 (60m x 7,500
Rs 500) (20m x £1.5 x Rs
250 : £1)
Current value of debt 20,000 –Using book value
EPS (Rs per share) 36.67 55
Gearing 40% 0.0%Measured as debt/(debt + equity)

After acquisition position Financed byFinanced by a

New Debt share for share
exchange
Combined group profit From part (b) – Rs 4,400 million –
after tax in 2023 (Rs millions) 3,900 3,900Rs 500 million for sale of surplus
land. Reasonable to assume
free cash flow is equivalent to profit
after tax.
Additional post tax loan interest at 6% (540) N/aNew loan of Rs 9,000 million x 0.06
(Rs millions)
Revised group profit 3,360 3,900
after tax (Rs millions)
Number of JKT shares (millions) 60 80 (60 + 20) One-for-one share exchange
20 million new JKT shares
issued to Safari Adventure
plc shareholders replacing
20 million Safari shares.
This will result in the
existing shareholder's
ownership in JKT reducing
from 100% to
66.6% (40m/60m).
Earnings per share (Rs) 56 48.75
Combined Value of 42,838 42,838From Part (a)
 Business Finance Decisions
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Suggested Answers

Equity (Rs Millions)

Value of Debt 20,000 + 9,000 10,000
(Rs millions) = 29,000
Gearing 40.36% 18.93%Measured debt/debt + equity
Impact of funding decision
This analysis assumes JKT pay the price of Rs 9 million for Safari Adventure plc.
Control and gearing
An acquisition with cash is preferred as existing JKT shareholder retain 100% control. However, credit
availability to arrange a further loan may not be available to JKT from its existing or other banks. Furthermore,
existing shareholders may consider the financial risk of increased gearing to 40.36% be unacceptably high.
However, this may not be a problem as this is largely unchanged.
The impact on working capital cash flow may be a greater problem as borrowing Rs 9,000 million at 6% will
mean an additional Rs 540 million of interest must be paid annually and this may be difficult to service in the
early years of acquisition where capital investment in the new venture is likely to be required. Also, it is possible
that existing Rs. 20,000 million loan will have used available security, making an additional Rs. 9,000 million
loan unsecured. Therefore a higher rate of interest on the loan may ultimately be charged.
A share-for-share exchange will reduce gearing from 40% to 18.93%. However, the terms of one JKT share for
one Safari share is generous as it values the Safari at Rs 10,
which is Rs 1,710 million above the offer price of Rs 9,000 million.
Earnings per Share (EPS)
Both financing methods predict an increased in EPS from Rs 36.67 in 2022 to Rs 56 if financed by debt and Rs
48.75 if financed by equity. The debt option is more attractive as the profit is retained by JKT's existing
shareholders.
Conclusion
Debt finance is cheaper than the equity finance option and it maximises post acquisition EPS at Rs 56
However, JKTs current gearing of 40% may be considered high and therefore shareholders may not be
comfortable with additional borrowing. New acquisitions tend to demand cash investment in the early years, so it
may be difficult for JKT to meet the annual interest and capital repayments on Rs 29,000 million of loans in the
early years post-acquisition.
It is recommended that JKT discuss additional borrowing with the banks, to confirm credit availability, and with
shareholders to confirm they will support higher borrowing at Rs 29,000 million. Detailed forecasts are
recommended to confirm that JKT can service the annual interest at this level of debt and only proceed with
further borrowing subject to securing confirmation of loan affordability.
If debt finance is not affordable or acceptable to JKT shareholders then an acquisition financed with a share-for
share exchange is recommended. However, it is recommended that revised share for share terms are negotiated so
JKT minimises the dilution of ownership to its existing shareholders.
Proceeding with an offer under either finance arrangement is subject to satisfactory completion of due diligence
procedures.
Gearing 3 marks calculation & 2 for discussion
Eps 3 marks calculation & 2 for discussion
Control 1 marks calculation & 2 for discussion
 Business Finance Decisions
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Suggested Answers

Answer: 2 (a)
Base case NPV of Malaysian project using ungeared cost of equity
Year 0 1 2 3 4
----------------------------- MYR'000 -----------------------------
Sales revenue (W-2) (inflating at 2%
from year 2) 127,500 277,440 353,736 451,013
Variable costs (W-4) (inflating at 2%
from year 2) (75,000) (166,400) (216,320) (281,216)
Fixed costs (inflating at 4%
from year 2) (30,000)
(31,200) (32,448) (33,746)
Net cash inflow before 22,500 79,840 104,968 136,051
tax
Taxation (W-5) 7,613 (20,217) (27,798) (50,471)
Investment (300,000) 240,000
Working capital (W-3) (29,988)
(25,500) (15,259) (19,455) 90,203
Total MYR cash flows (325,500) 125 44,363 57,714 415,783
Exchange rate (W-1) 0.0290 0.0282 0.0274 0.0266 0.0258
Total cash flows (Rs.'000) (11,224,138) 4,433 1,619,088 2,169,699 16,115,620
Discount factor (W-6) 1.000 0.893 0.797 0.712 0.636
Present value (Rs.'000) (11,224,138) 3,958 1,290,413 1,544,826 10,249,534

Base case NPV (Rs.'000) 1,864,593

Project appraisal criteria
1 An overall surplus, in present value terms, based on APV investment appraisal techniques:
APV calculation
Rs. in '000
Base case 1,864,593
PV APV benefits (W-8) 1,832,650
APV 3,697,243
The project is forecast to deliver a significant adjusted present value of Rs. 3,697 million which suggests
the directors of PEM should proceed with the project. However, this analysis significantly relies on forecast
production volumes supplied by the Malaysian Government, achieving the average unit price of MYR 8,500
and the estimates of variable costs which include the volatile price of precious metals.
It is recommended the directors conduct a detailed sensitivity analysis and complete independent due
diligence to corroborate the price, cost and volume assumptions made. (2 marks)
Workings
1. Forecast exchange rates (2 marks)
Forecast exchange rates using purchasing power theory where inflation in Malaysia is 2% per annum and
inflation in Pakistan is 5% per annum.
Time (MYR/Rs.)
Current 0.029
 Business Finance Decisions
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Suggested Answers

Year 1
Year 2
Year 3
Year 4
2. Revenue (2 marks)
(Unit price

Year 1 2 3 4
Per unit 8,500 8,500 8,500 8,500
Production 15,000 32,000 40,000 50,000
Inflation at 2% 1.02 1.022 1.023
Forecast revenue (MYR'000) 127,500 277,440 353,736 451,013
3. Working capital (2 marks)
Year 0 1 2 3 4
----------------------- MYR'000 ----------------
-------
Working capital 25500
(20% of sales 55488 70,747 90.203
revenue)
Working capital
required/(release (25,500) (29,988) (15,259 (19,455) 90203
d)
4. Variable costs (2 marks)

YEar 1 2 3 4
MYR ‘000’
Per unit cost 5000 5000 5000 5000
PRoduction 15,000 32,000 40,000 50,000
Inflation @ 4% 1.04 1.04^2 1.04^3
Variable cost 75,000 166,400 216,320 281,216
5. Taxation (2 marks)
Year 1 2 3 4
--------------------------- MYR'000 ---------------------------
Profit before tax 22,500 79,840 104,968 136,051
Tax-allowable depreciation:
Initial
Regular % 120,000–82,012
(48,750) (10,125) (9,113) 37,988*
Taxable profit (26,250) 69,715 95,856 174,039
Taxation @ 29% 7,613 (20,217) (27,798) (50,471)
Note. Tax written down
value 101,250 91,125 82,013
* Balancing charge on sale of plant of machinery at the end of year 4
6. Discount rate (2 marks)
 Business Finance Decisions
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Suggested Answers

Using APV investment appraisal techniques, PEM’s ungeared cost of equity is used to calculate the base case
NPV. PEM's equity beta is ungeared to calculate an asset beta which, using CAPM, determines the project’s
discount rate.
PEM equity beta = 1.87
MVe = Rs. 325 per share × 100 million shares = Rs. 32,500m MVd = Rs. 15,000m × 1.2 = Rs. 18,000m
PEM asset beta assuming debt is risk free:

 Ve 
a    e
 Ve  Vd 1  t  

Asse –
Project asset beta = 1.342 + 0.20 = 1.542
Using CAPM, project discount rate if all-equity financed

7. New finance required (2 marks)

MYR'000
Investment in land and buildings, plant and machinery 300,000
Initial working capital requirement (W3) 25,500
325,500
8. Tax shield and subsidy benefits ( 4 marks)
Year 1 2 3 4
----------------------- MYR'000 -----------------------
Loan interest 5% * 16,275 16,275 16,275 16,275

Annual tax shield benefit 4720 4720 4720 4720

Annual government loan

subsidy benefit** 9,244 9,244 9,244 9,244
Total APV benefits 13,964 13,964 13,964 13,964

5% discount rate 0.9523 0.8638

Note. APV requires use of loan rate
to determine PV of tax shield 0.907 0.823
Present value in MYR'000 13,294 12,665 12,065 11,492
Exchange rate 0.0274 0.0258
Present value in Rs. '000 471,407 462,237 453,566 445,439
Total present value of APV 1,832,6
benefits in Rs. '000

– tax rate) = (9%– – 0.29) = 9,244

If discounting is done at Rf or Full kd that is also acceptable
 Business Finance Decisions
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Suggested Answers

Answer: 2 (b)
Appropriateness of APV method
 APV should be used when there is a significant capital requirement to be satisfied by debt finance. In
the case of the FZT , the forecast base case NPV is positive accounting for more than 50% of the total
APV which indicates a decision to proceed is suitable as it is not overly reliant on the tax shield or loan
subsidy.
 It is assumed that PEM's existing beta is an appropriate starting point to determine the asset beta used to
determine the base case NPV. As manufacturing will be in a different country and sales will be to new
markets in Asia which PEM has previously failed to penetrate, it is likely the project risk is higher than
reflected in the discount rate used despite a 0.2 adjustment to the asset beta.
 PEM's ungeared cost of equity using the asset beta is calculated on the assumption that Modigliani and
Miller's ungearing proposition holds, which it may not do. It is difficult to determine an accurate
ungeared cost of equity in practice.
 APV calculations assume additional project cash flows arise due to tax savings and the benefit of loan
subsidies. These benefits may not be realized if there is an overall tax loss and/or the offer of a
subsidized loan from the Malaysian Government is withdrawn; for example, following a change in
administration after the election in two years' time.
Appropriateness of other assumptions made in determining base case NPV
 The success of the project relies on achieving the forecast price, sale volumes and costs of manufacture.
It is unknown if forecast sale volumes provided by the Malaysian Government are realistic. PEM is
advised to undertake market due diligence to corroborate Government forecast sale volumes and
perform detailed cost budgeting to confirm the forecast costs are realistic.
 The project assumes that the manufacturing site will be sold for MYR 240 million at the end of year 4
to the Malaysian Government. It is unknown how certain this sale is. If this is delayed, the sale fails to
happen or it is withdrawn then this will result in a negative APV. Certainty over the sale in year 4
should ideally be established before the project is accepted.
Initial working capital of MYR 25.5 million represents part of the funds borrowed. However, forecast subsequent
increments in working capital are assumed will be financed by the project itself. As the company may not have
the necessary funds at the start of the project to finance the working capital then it is reasonable to question
whether PEM will be able to finance incremental working capital in subsequent years.
A change of government in Malaysia may have a significant impact on the project as a result of policy reviews
threatened by the opposition party. A proposed tax increase may be significant as this would increase taxes
payable and potentially reduce the total tax shield and subsidy benefits if the preferential rate is reviewed or
withdrawn.
Appropriateness of PEM using the APV method (3 marks)
Assumption in Question discussion (3 marks)
 Business Finance Decisions
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Suggested Answers

Answer: 3 (a)
The currency swap will involve Beatle Co taking out a loan in Rs and making an arrangement with a counterparty
in Walancia, which takes out a loan in $. Beatle Co will pay the interest on the counterparty’s loan and vice versa.
Advantages
Payment of interest in $ can be used to match the income Beatle Co will receive from the rail franchise, reducing
foreign exchange risk. Beatle Co will be able to obtain the swap for the amount it requires and may be able to
reverse the swap by exchanging with the other counterparty. Other methods of hedging risk may be less certain.
The cost of a swap may also be cheaper than other methods of hedging, such as options. The swap can be used to
change Beatle Co’s debt profile if it is weighted towards fixed-rate debt and its directors want a greater proportion
of floating-rate debt, to diversify risk and take advantage of probable lower future interest rates.
Drawbacks
The counterparty may default. This would leave Beatle Co liable to pay interest on the loan in its currency. The
risk of default can be reduced by obtaining a bank guarantee for the counterparty. The swap may not be a
worthwhile means of hedging currency risk if the exchange rate is unpredictable. If it is assumed that exchange
rates are largely determined by inflation rates, the predicted inflation rate in Walancia is not stable, making it
more difficult to predict future exchange rates confidently. If the movement in the exchange rate is not as
expected, it may turn out to have been better for Beatle Co not to have hedged. Beatle Co is swapping a fixed-rate
commitment in the Eurozone for a floating rate in Walancia. Inflation is increasing in Walancia and there is a risk
that interest rates will increase as a result, increasing Beatle Co’s finance costs. The swap does not hedge the
whole amount of the receipt in Year 3. Another method will have to be used to hedge the additional receipt from
the government in Year 3 and the receipts in the intervening years. If the government decides to impose exchange
controls in Walancia, Beatle Co may not be able to realize the receipt at the end of Year 3, but will still have to
fulfill the swap contract.
Answer: 3
Part B (i)
Calculate interest savings
Fixed rate Floating rates Proposed Swap Structure
Buryecs 0.14 WBR+0.6% WBR+16.4%
Counterparty 0.158 WBR+0.4% WBR+14.4%
Savings 2% 1 Mark
Beatle will borrow at fixed rate 14% in Pakistan and Counter party will borrow at floating rate
WBR + o.4% in Walancia 1 Mark
Distribute the savings Fee Calculate Net savings
Beatle 1.20% 0.30% 0.90%
Counterparty 0.800% 0.20% 0.60%

After Swap Cost After Swap cost

Buryecs WBR+0.6% 0.90% WBR-0.3% 1 Mark for after swap cost
Counterparty 15.80% 0.60% 15.20%

Buryecs Counter party 1 Mark for structure

Borrow from Bank -14% ( WBR +0.4% )

Recieve 14.60% WBR

pay (WBR) -14.60%

Before Fee cost Wbr-0.6% 15.00%

Fee 0.30% 0.20%
After swap cost WBR-0.3% 15.20%

Part B (ii)
Calculation of NPV (millions)
Years 0 1 2 3 3 3
Cashflows $ m -5000 600 600 600 5000 2500
Exchange rate Rs/$ 180.0000 170.3571 158.8075 146.1029 180.0000 146.1029 2 mark
Cashflows Rs m (900,000) 102,214 95,285 87,662 900,000 365,257
14% 1.000 0.877 0.769 0.675 0.675 0.675
PV -900000.0 89661.7 73318.3 59169.2 607474.4 246538.2
NPV 176,161.78 1.5 mark
Without swap

Years 0 1 2 3 3 3
Cashflows $ -5000 600 600 600 5000 2500
Exchange rate Rs/$ 180 170.3571429 158.8075061 146.1029056 146.1029056 146.1029056 2 mark
Cashflows Eur -900000.0 102214.3 95284.5 87661.7 730514.5 365257.3
14% 1.000 0.877 0.769 0.675 0.675 0.675
PV -900000.0 89661.7 73318.3 59169.2 493076.5 246538.2
NPV 61,763.91 1.5 mark

Gain on swap 114397.9 1 mark

Part C
Currency Options

Amount of FCY W$ 7500

Buy Rs Call option 1 mark
Exercise price Rs/$ 145 155
Premium Cost 1.80% 2.80%
Premium in W$ 135 210
Premium in PKR (m) 24300 37800 1 mark

Decide to exercise option or not

Exercise rate 145 155
Closing spot 146.1029056 146.1029056
not exercised Gain 8.897094431 1 mark
66728.20823

PKR PKR
Expected Receipts 1,095,772 1,095,772 1 mark
Gain 66,728
Premium in PKR (m) 24,300 - 37,800 1 mark
Net receipts 1,071,472 1,124,700 1 mark

155 Rs/$ is a better exercise price beacuase it is yielding higher receipts 1 mark

Comare it with Swap PKR

In options receipts 1,124,700
In swap receipts 1265257.3
Gain on swaps 140557.3
Answer: 4
Tanveer Co
Part a)
Cost of capital of Tanveer Company
Market values Cost %
Rs m %
Equity 18 14.43% 2.60
Debt 3.6396 5.59% 0.20
21.6396 2.80
WACC 12.95% 1 mark
Equity shares ( m) 10
Mv /share 1.8
Equity value 18

Cost of equity 14.43% 2 Marks

Rf 3.50%
Equity Risk Premium 5.80%
Be 1.89

Ungear the Proxy co IFFI be Ungear the Other activites

Be 1.4 Be 1.25
Mv of equity (m) 480 Mv of equity (m) 360
Mv of debt (m) 96 Mv of debt (m) 76.8
Tax 25%
Ba 1.22 1 Marks Ba 1.08 1 Marks

Calculate the Ba of innovative component

Total Ba of IFFI=Ba of other activities x 75%+ Ba of innovative component x 25%
1.22=1.08*0.75+ba*0.25
Ba 1.637
Regear it with Tanveer co gearing
Equity 18
Debt 3.6396
Be 1.89 3 Marks

Part B
Prcess Alpha Beta
IRR 27.30% 25.57%
MIRR 22.68% 23.35%
According to IRR method Process Alpha is more benefical and should be selected but there is one problem with IRR that it assumed the
reinvesment of cashflows at calculated IRR that is very high and practically not possible.MIRR method assumes that cashlfows will be
reinvested on cost of capital which is practically possible and based on MIRR process Beta should be selected

2 mark
Process Alpha
Years 0 1 2 3 4
Post tac cashflows -3800 1220 1153 1386 3829
IRR 27.30% 1 mark
MIRR 22.68% 1 mark

Process Beta
Years 0 1 2 3 4
Post tac cashflows -3800 643 546 1055 5990
IRR 25.57% 1 mark
MIRR 23.35% 1 mark

Working
Spot Yields
Year 1 Valuation of Bond
Bond 1 104=9+100/1+r AA rating
Spot Yield 4.81% 1 mark Year 1 2 3
Year 2 Cash flows 80 80 1080
Bond 2 102=7/1.0481+107/(1+r)^2 Discount factors 0.95 0.88 0.80
Spot Yield 5.95% 1 mark PV 75.94 70.35 864.65
MV 1010.94 1 mark
Year 3
Bond 3 98=6/1.0481+6/1.0595^2+106/(1+r)^3 Year 0 1 2 3
6.83% Cashflows -1010.94 60 60 1060
workings 5.724770642 YTM 5.59%
5.345019922 1 mark
86.93020944
Spot Yield 6.83% 1 mark

Year 1 2 3
Spot Yield 4.81% 5.95% 6.83%
Spread of BBB 0.54% 0.69% 0.86%
Discpunt factor for BBB 5.35% 6.64% 7.69%
 The Professionals’ Academy of Commerce
Pakistan’s Leading Accountancy Institute

Certified Finance and Accounting Professional Stage Mock Examinations

28 May, 2022
3 hours – 100 marks
Additional reading time - 15 minutes

Tax Planning & Practices

Q.1 On December 2021, Bakir Limited (BL) a tier one retailer purchased two point of sale machines amounting to
Rs. 120,000 and Rs.250,000 respectively for installation and integration with Board’s computerized system.
Taxable income for tax year 2022 was Rs.12,000,000. The income was arrived at after adjustment of the
following items:
(i). Stock consumed has been computed as follows:
Opening stock 5,000,000
Purchases 65,000,000
Closing stock (32,000,000)
38,000,000
The net realizable value of the closing stock is Rs.40,000,000 against its cost of Rs.35,000,000
(ii). An amount of Rs.2,500,000 received a compensation from Sui Northern Gas Limited (SNGP) for
partial loss of profits on account of disrupted gas supply, as per the terms of agreement.
(iii). Legal and other fees of Rs.200,000 paid in connection with acquisition of piece of land during the year
amounting to Rs.5,000,000.
(iv). Gain of Rs. 1,000,000 on sale of piece of land (sale value Rs.6,000,000) acquired during the year at
(iii) above. The entire sale proceed was received in cash.
(v). Sold a machine for total consideration of Rs.1,000,000. The machine had been purchased for
Rs.1,500,000 on 01 August 2020 and was used in manufacture of IT products. No gain or loss has been
recognized in the accounts as the sale proceeds were still recoverable by the company on 30 June 2022.
(vi). Gain of Rs.200,000 on sale of locally manufactured 1500CC motor vehicle which was sold prior to its
registration. BL purchased the vehicle from local manufacturer in 2022.
(vii). Rs.1,000,000 as return on investment in sukuks from a special purpose vehicle.
(viii). Administrative expenses including the following:
(a). Rs. 1,000,000 paid as rent for an office for two years from 01 July 2021.
(b). Rs.50,000 as donation to a political party which is staunch supporter of lower taxation for corporate
sector.
(c). Rs.100,000 as legal expenses for filing a court case against a former employee for the recovery of loan
advanced
(d). Rs.200,000 to Karachi Port Trust (KPT) for not lifting imported goods from the docks within the time
stipulated in KPT rules.
Required:
(i). Compute correct taxable income and tax liability of BL under the appropriate heads of income for the
tax year 2022. (15)
(ii). Give comments/reasons for the inclusion or exclusion in the computation of taxable income of each of
the item listed above. (11)

Q.2 You are working as Tax Manager in Nomani and Co. Chartered Accountants and are looking after tax affairs
of over 15 clients. Your tax partner has sought your opinion of following issues confronted by various clients
for the year ended 30 June 2022:
Non furnishing of withholding statement within due date by ABC Limited
Withholding tax was deducted and deposited on due date for all eligible transactions during the year, however
the company failed to file withholding statement of last quarter.
 Tax Planning & Practices |Page 2 of 4

Withholding tax on foreign payment by XYZ Limited

Selling expenses include a payment of Rs.5 million for advertisement services to Wireless Operators Dubai
(WOD), a non resident media person relaying from outside Pakistan. No tax was deducted from the payment
on the ground that WOD has no permanent establishment in Pakistan.
Legal and professional charges by OMG Limited
An invoice of Rs. 2 million was kept in suspense and not accounted for in the accounts for year ended 30 June
2021 as management of OMG Limited was negotiating with lawyer to reduce their charges. It was not claimed
as expense in tax year 2021. The Rs. 2 million was paid to lawyer on 03 June 2022 and was recorded as
expenditure while preparing tax computation for tax year 2022.
Adjustment of losses by CPL Limited
Company has calculated its taxable income in the following manner:
Head of income Amount
Foreign income from business 50,000,000
Foreign loss from other source (20,000,000)
Local loss from business (30,000,000)
Local income from other source 30,000,000
Local loss from property (20,000,000)
Loss from agriculture income (5,000,000)
Taxable income 5,000,000
Loss to be carried forward Nil
Purchase of apartment by HSA Limited
Company has recently purchased an apartment amounting to Rs. 50 million for their corporate office, however
no withholding tax was deducted while making the payment.
Futures contracts and swap dealing by JSB Bank Limited
Bank has regular dealing in future contracts and swaps. CFO of the company is not sure about how income of
bank will be computed from dealing in future contracts/swaps.
Unamortized expenses by GAMA Limited
Company has incurred substantial expenditures on renovation of rented business premises when acquired in
tax year 1. Company was expecting that they will retain the premises for 5 years and accordingly planned to
amortize the expenditure over a period of 5 years. However, company has decided to vacate the premise in tax
year 4. CFO has asked your opinion regarding treatment of unamortized expenditure representing 40% of total
expenditure.
Required:
In the light of the provisions of the Income Tax Ordinance, 2001 read with Income Tax Rules, 2002 explain
the correct treatment to be adopted including if necessary the computation of income or loss in respect of each
of the above independent transactions. (15)

Q.3 (a) Mahad Limited (ML) is a manufacturer of high quality surgical tools. ML has one main manufacturing site in
Lahore. The main head office is located on the same site as the factory, with a second office in Islamabad used
primarily for meetings.
ML sells surgical tools all over the world, with 90% of items being exported, and invoiced in the customer’s
domestic currency. ML has a world class reputation for the quality of its surgical tools.
In a bid to improve margins, the board is considering outsourcing manufacture of most of its product range to
a reputable manufacturer in Malaysia. The Malaysian provider will be required to invest in machinery and
training, but ML have agreed in principle to lend them the money of Rs. 500 million @ 10% per annum to
enable them to invest.
Required:
In the light of the provisions of the Income Tax Ordinance, 2001 read with Income Tax Rules, 2002 briefly
discuss the income tax implications of outsourcing the products to the manufacturer in Malaysia. (05)
(b) As part of group restructuring, a resident holding company has set up a wholly owned subsidiary outside
Pakistan. The control and management of the subsidiary affair’s is situated wholly in Pakistan. Shares held by
the holding company in different subsidiaries and associated companies have been transferred to offshore
subsidiary at breakup values being higher than their respective costs.
 Tax Planning & Practices |Page 3 of 4

Required:
In the light of the provisions of the Income Tax Ordinance, 2001 briefly explain whether holding company is
required to pay any tax on the difference between the breakup value of shares and their respective cost prices.
(05)
(c) In the light of the provisions of the Income Tax Ordinance, 2001 explain the withholding tax implications for
each of the following transactions:
(i). Payment to non resident for goods acquired through internet from outside Pakistan
(ii). A company purchasing airline tickets from a travel agent
(iii). Distribution of profit by a joint venture to its members
(iv). Payment of lease rentals to a non resident company having no permanent establishment (PE) in
Pakistan
(v). Rental payment by resident company who has acquired land from the Federal Government to explore
for precious stones and mineral deposits
(vi). Payment of copyrights and patents
(vii). Company executive acquiring goods and services through credit card payments that are later
reimbursed to them by company
(viii). A company who intends to issue ordinary shares to its creditors in lieu of settlement of their accounts
(08)

Q.4 (a) In the light of the provisions of Sales Tax Act, 1990 and relevant rules made thereunder, briefly explain the
sales tax implications in respect of each of the following independent situations:
(i). On 01 December 2021, ABC Limited sold taxable goods worth Rs.300,000 and purchased taxable
goods worth Rs.200,000 from single party XYZ Limited. Net payment of Rs. 100,000 along with
relevant sales tax was received by ABC Limited on 10 April 2022 to settle their account. On 19 May
2022, ABC Limited received a notice from Tax department for disallowance of input tax on purchase
of taxable goods of Rs.200,000.
(ii). Abdullah Private Limited (APL) is engaged in the business of manufacturing and sale of electricity and
is registered with Inland Revenue authority in Lahore. Company has received five notices under
various different sections of the Sales Tax Act, 1990 for audit of their sales tax affairs. CFO of the
company is of the opinion that a person can be selected for audit under one section only and there is no
need to respond to other four notices.
(iii). Shifa (Pvt.) Limited (SPL) is engaged in the business of trading. Recently, Commissioner Inland
Revenue (CIR) has written a notice to custom authorities to stop clearance of imported goods of SPL
as demand of Rs.50 million pertaining to tax year 2020 is still pending. CFO of SPL is of the view that
CIR is not authorized to stop clearance of imported goods. Moreover, he is of the opinion that this
demand is not payable as company has already file an appeal in CIR-Appeals which is pending
adjudication. (09)
(b) Hiba Private Limited (HPL) is a manufacturer of clothing based in Lahore. HPL’s customers are fashion
retailers. They provide HPL with designs for the clothing that they require. HPL makes the clothing, dyeing
the materials to the required colour, sewing the clothes and embroidering the customer’s brand name onto
them.
Typically, the work is performed in batches and stored in HPL’s warehouses until the customer requests
delivery. HPL employs 50 staff members.
The sales director has suggested to owner of HPL that the company should set up an online store to sell
clothing directly to customers. He points out the high profit margins that HPL’s customers enjoy, often selling
clothing for more than twice the wholesale price that they pay to HPL. He has suggested that if HPL can sell
directly to end customers then it could enjoy the benefit of these higher margins.
Required:
In the light of the provisions of Sales Tax Act, 1990 read with Sales Tax Rules, 2006, Discuss the sales tax
implications on HPL if it decides to set up an online store. (08)

Q.5 Mr. Junaid has intentionally created an offshore entity in a Dubai where there is no taxation due to presence of
double taxation treaty with Pakistan.
 Tax Planning & Practices |Page 4 of 4

Required:
In the light of the provisions of the Income Tax Ordinance, 2001 briefly explain whether this will be treated as
tax avoidance or tax evasion. What powers does Commissioner have to counter any such tax
avoidance/evasion. (04)

Q.6 Alpha Limited (AL) a company listed on PSX is engaged in variety of businesses across Pakistan. Various
divisions of AL are registered with federal and provincial sales tax authorities as manufacturer, importer,
wholesaler-cum-retailer. AL is also registered with Engineering Development Board. Following information
has been extracted from AL’s records for the month of May 2022.
Particulars Rupees in Million
Taxable supplies to registered person 100
Taxable supplies to un-registered person 85
Purchases from registered suppliers 350
Import of raw material 50
Machinery having no compatible substitute purchased from registered supplier 20
(i). Taxable supplies to registered person include the following:
 Natural gas worth Rs.20 million supplied to chemical plant in Karachi.
 Natural gas worth Rs.10 million supplied to fertilizer plants in Faisalabad for urea
manufacturing.
 Phosphoric acid worth Rs.5 million supplied to fertilizer plants in Lahore for manufacturing of
DAP.
 Locally manufactured laptops worth Rs. 5 million to a distributor.
(ii). Taxable supplies to un-registered person consist of the following:
 Supply of taxable goods worth Rs. 30 million to a distributor Mr. Hamza.
 Supply of taxable goods worth Rs. 20 million to Mr. Bilawal which is a cottage industry.
 Supply of taxable goods worth Rs. 15 million to Federal Government.
 Supply of taxable goods worth Rs. 20 million to wholesaler Daga Limited.
(iii). Raw material import consists of laptop batteries and adopters of Rs.30 million for manufacturing of
laptop and edible fruits of Rs.20 million.
All the above figures are exclusive of sales tax, except where it is implied otherwise.
Required:
In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, compute the amount of
sales tax payable by or refundable to AL and input tax to be carried forward, if any, for the tax period May
2022. (14)
Q.7 Musharaf Limited (ML) is engaged in the business of manufacturing and import of cigarettes and is registered
under the Federal Excise Act, 2005. ML sells two different brands of cigarettes viz. A and B in retail packing.
Following information is available from ML’s records for the month of May 2022:
Brand A: Import of 195,000 packs of cigarettes from Greece. The value assessed by customs authorities at
import stage amounted to Rs. 39,000,000. ML sold 160,000 packs at a wholesale price of Rs. 220 per pack to
a large distributor in Lahore whereas the remaining packs were sold on one-month credit to a departmental
store in Karachi at a retail price of Rs. 250 per pack of 10 cigarettes.
Brand B: Purchase of 3,900 kg of unmanufactured WP tobacco worth Rs. 323,700 from district Swabi. The
tobacco was provided to an independent manufacturer, Parwaz Limited (PL), in Peshawar for the manufacture
of brand B cigarettes. PL manufactured 390,000 packs of cigarettes and invoiced gross conversion charges of
Rs. 7,800,000 to ML. All the packs were sold by ML to various stores at a retail price of Rs. 38 per pack of 10
cigarettes. ML paid the conversion charges on 2 June 2022.
Required:
Under the provisions of the Federal Excise Act, 2005 compute the amount of duty payable by or refundable to
ML for tax period May 2022. (06)

(The End)
 Tax Planning & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Answer: 1
Marks
Income from Business
Taxable income 12,000,000
Add inadmissible expenses/admissible incomes
Adjustment in the value of closing stock 3,000,000 1
Compensation from SNGP-No adjustment - 1
Legal and other fee-capital nature expense 200,000 1
Tax gain on sale of IT machinery 212,500 1
Rent paid in advance 500,000 0.5
Donation paid to political party 50,000 0.5
Legal expenses for loan recovery 100,000 0.5
Fine to KPT - 0.5
4,062,500
Less admissible expenses/inadmissible incomes
Sale of land-taxable as separate block 1,000,000 0.5
Gain on sale of 1500 CC motor vehicle - 0.5
Return on investment in sukuk-taxable as separate block 1,000,000 1
2,000,000
14,062,500

Capital gain
Gain on sale of land (Rs.6,000,000-5,200,000)-taxable as separate block 800,000 1

Income from other source

Return on investment in sukuks-taxable as separate block 1,000,000 1

Total income 15,862,500 0.5

Less income subject to separate block/FTR 1,800,000
Taxable income 14,062,500 0.5

Tax liability @ 29% 4,078,125

Tax credit being lower of actual amount invested or

Rs.150,000 per machine:
Machine A 120,000 0.75
Machine B 150,000 0.75
270,000
Advance tax on sale of 1500CC vehicle prior to registration 200,000 1

NTR Liability 3,608,125

Gain on sale of land @ 3.5% 28,000 0.5
Return on investment in sukuks @ 25% 250,000 1
Total tax liability 3,886,125 15
 Tax Planning & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Comments

(i) The closing stock for the tax year can be lower of cost or net realizable value. It cannot be lower than 1
both of these values. The amount of Rs.3,000,000 is therefore, added back to income to make the
value of closing stock equal to cost.

(ii) Compensation received on account of loss of revenue due to disruption of the production process is 1
revenue in nature and is covered in the definition of income. No adjustment is required.

(iii) Land is a capital asset of the company. Any expenditure incurred to acquire or improve capital asset 1
is treated as capital expenditure and is not allowable as deduction against income from business.
Hence legal and other fees spend to acquire land are not allowable as revenue expenditure but are
capitalized.

(iv) Legal fee of Rs.200,000 will be added in cost of the land and gain will be taxable as separate block. 1
There will be no consequences for receiving sale proceeds in cash.

(v) Business income is chargeable to tax on accrual basis. Gain will be calculated in the following
manner:
Cost 1,500,000
Initial allowance @ 25% 375,000
WDV 1,125,000
Depreciation @ 30%/2 168,750
WDV at start of tax year 2022 956,250
Depreciation @ 15%/2 168,750
WDV in tax year 2022 787,500
Sale value 1,000,000
Gain on sale of machinery 212,500
Depreciation expense will be split as 50% in the year of purchase and 50% in the year of disposal. 1
Moreover, depreciation rate on machinery used in manufacture of IT products is 30%

(vi) Every motor vehicle registration authority of Excise and Taxation department shall at the time of 2
registration collect tax at the rate of Rs.200,000 for vehicle of engine capacity 1000-2000CC. The said
tax will be collected only if the locally manufactured motor vehicle is sold prior to registration by the
person who originally purchased it from local manufacturer. The said tax collected is adjustable
against normal tax liability.

(vii) Return on investment in sukuks from a special purpose vehicle is taxable as separate block @ 25% in 1
case sukuk holder is a company.

(ix) (a) Since half of the rent paid relates to the next tax year, it is disallowed at Rs.500,000 0.5
(b) Donation of Rs.50,000 made to political party is not allowable expense because it 0.5
was not for the purpose of business. Further, a donation paid to a political party does
not qualify for any tax credit.
 Tax Planning & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
(c) BL is not in the business of lending money. The legal expense of Rs.100,000 0.5
incurred in connection with a loan given to a former employee is not an expenditure
incurred wholly and exclusively for the purpose of business. Therefore, Rs.100,000 is
not deductible.
(d) Rs.200,000 paid to KPT for not lifting the imported goods from the dock is an 0.5
expenditure incurred wholly and exclusively for the purpose of business and is
therefore deductible expense. The payment is not a fine or penalty for violation of any
law, rule or regulation.

(x) A person who is required to integrate with Board's computerized system for real time reporting of sale 1
or receipt shall be entitled to tax credit in respect of amount invested in puchase of point of sale
machine subject to lesser of actual amount invested or Rs.150,000 per machine.
11

Answer: 2 (02 Marks for each correct answer, except part (iv) which carries 3 marks)
(i) Non furnishing of withholding statement within due date
As per section 182(1A), where any person fails to furnish a quarterly withholding statement under
section 165, such person shall pay a penalty of Rs.5,000 if the person had already paid the tax
collected or withheld within due date for payment and statement is filed within 90 days from the
due date of filing the statement. In case statement is filed beyond 90 days, a penalty of Rs.2,500 for
each day of default subject to minimum penalty of Rs.50,000 will be charged.
(ii) Advertisement services to WOD
Every person making a payment for advertisement services to a non-resident person relaying from
outside Pakistan is required to deduct tax @ 10% which constitutes minimum tax liability of non
resident. The payment of Rs. 5 million to nonresident Wireless Operators Dubai is therefore not
deductible as non tax was deducted from the payment made.
(iii) Legal and professional charges
Deductions can be allowed in respect of only those expenses incurred in the relevant accounting
year and expenses incurred before the commencement of that year are not deductible under the
accrual basis accounting.
RL being a company has to account for income chargeable to tax under the head income from
business on an accrual basis. The expenditure of Rs. 2 million was incurred in accounting year
ended 30 June 2021 (tax year 2021) and should have been claimed as a deduction in that tax year
and not in any subsequent year. Therefore, the expenditure of Rs. 2 million is not deductible in tax
year 2022.
(iv)
Income from business
Foreign income from business 50,000,000
Local loss from business (30,000,000)
20,000,000
Income from other source
Local income from other source 30,000,000
Income from property
Local loss from property (20,000,000)
Taxable income 30,000,000
Foreign loss from other source to be carried 20,000,000
forward for 6 years
 Tax Planning & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Since agriculture income is exempt from tax, this loss cannot be adjusted against any other income
nor can be carried forward,
(v) Purchase of apartment
Payment for purchase of immoveable property is not subject to withholding tax. The term good is
defined in the Sales Tax Act, 1990 wherein immoveable property is excluded from the definition of
goods.
(vi) Dealing in swap and future contracts
Since future contract/swaps are settled otherwise than by actual delivery, income from regular
trading in future contracts will be treated under the head “income from speculation business”.
(vii) Unamortized expenditures
A person is treated as having disposed of an asset at the time the person parts with its ownership.
Parting with an asset includes cancellation, redemption, relinquishment, destruction, loss, expiry or
surrendering of the asset. This rule also holds good for intangible costs. The total amount of
unamortized expenditure less any consideration received on vacating the premises will be tax
deductible in tax year 4.

Answer: 3
(a) Marks to be split equally for each correct point)
 ML will be able to claim all expenses incurred in relation to import of its product range
including payment to outsource partner, custom duties, ancillary import expenses, etc.
 The income tax paid at the import stage will be considered as minimum tax.
 Further, ML has provided loan to the outsource partner for setting up the loan at 10% mark
up. If any tax is deducted by the outsource partner in Malaysia, ML can claim lower of
foreign tax paid and the Pakistani tax payable on interest income.
(b) (Marks to be split equally for each correct point)
No gain or loss is recognized in case assets are disposed of between wholly owned resident group
of companies provided the transferee company is not exempt from tax and it undertakes to
discharge any liability in respect of the assets acquired and such liabilities do not exceed cost of the
assets to the transferor company at the time of disposal. (2 marks)
A company is treated resident for a tax year if control and management of its affairs is situated
wholly in Pakistan during the tax year. (01 mark)
A holding company and its wholly owned subsidiary are treated as belonging to wholly owned
group of companies. (0.5 mark)
In the light of the above and if the conditions discussed above are met, the holding company will
not be required to pay any tax on difference between the breakup value of shares and their
respective cost prices. (1.5 mark)
(c) (01 mark for each correct answer)
(i). Goods acquired through internet are generally exempt from tax as related income does not
accrue or arise in Pakistan. Accordingly, withholding will not be required in such case.
(ii). The company will be required to withhold tax @ 8% of the gross amount unless the travel
agent have paid withholding tax on their commission income
(iii). Distribution of profit by joint venture to its members is not considered dividend and hence is
not subject to withholding tax.
 Tax Planning & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
(iv). Lease rentals paid to non resident with no PE are subject to withholding tax @ 20% unless a
reduced or zero rate is provided under the tax treaty.
(v). The company is not required to withhold tax from payments to the Government as these are
exempt from withholding tax.
(vi). Payment on account of copyrights and patents are treated as royalty. There will be no
withholding in case royalty is paid to resident person. Withholding tax @ 15% will be
deducted in case the recipient is a non resident person having no PE in Pakistan.
(vii). Payment in such case should be made by executives on a net off tax basis and evidence
relating to tax deduction given to supplier. Else, related withholding tax will have to be borne
by the company.
(viii). Withholding tax obligations are not subject to mode of payment or settlement. The company
should make sure that either the amount of withholding tax is collected from creditors or
shares are issued for value net of withholding tax.

Answer: 4 (a) (03 Marks for each correct answer)

(i). Although adjustments made by a registered person in respect of amount payable and receivable to
and from the same party is treated as payment under section 73, yet prior approval of the
Commissioner is required before making such adjustments. Since the company did not seek prior
approval of CIR, therefore, input will be disallowed.
(ii). A registered person can be selected for audit of its sales tax affairs under the following three
sections:
 Access to records and documents u/s 25- In terms of section 25, an audit of registered person
may be conducted once a year.
 Authorized officer to have access to premises, stocks, accounts and record u/s 38- Section 38
empowers the tax department to conduct investigation of registered person without any time
limitation and allied framework.
 Selection of audit by Board u/s 72B- Section 72B empowers the Board to select persons or
classes of persons for audit of sales tax affairs through computer balloting which may be
random or parametric.
There is no provision in the sales tax act which prohibits that a person cannot be selected for
multiple audits in all above three sections at any time. Therefore, contention of the CFO is wrong.
(iii). As per section 48, officer of Inland Revenue is authorized to stop clearance of imported goods
where any amount of tax is due from any person. Therefore, view of the CFO is wrong on this
front.
Moreover, Commissioner Inland Revenue cannot issue notice for recovery of any tax due from a
taxpayer if the said taxpayer has filed an appeal under section 45B to CIR-Appeals and the appeal
has not been decided by the Commissioner (Appeals), subject to the condition that ten per cent of
the amount of tax due has been paid by the taxpayer. Since company has not paid 10% of the tax
due, therefore this view of CFO is also wrong.
(b) (0.8 Mark for each correct point)
The setting up on an online store would attract the following sales tax implications for HPL:
 HPL would have to apply to the sales tax authorities for registration as Tier-I retailer.
 On receiving the revised certificate from sales tax authorities, HPL’s status would be changed
from ‘manufacturer to ‘manufacturer cum retailer’.
 Tax Planning & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
 Since HPL has combined the business of manufacturing with retail, it would need to notify an
advertisement for retail price and declare the web address.
 The retail price should be the price fixed by HPL, inclusive of all charges and duties (other
than sales tax) at which its products are sold in the market. However, in the case of more than
one price for any variety is fixed, the highest of such price will be taken for the purpose of
sales tax.
 It is mandatory for every Tier-1 retailer to integrate their retail outlets (including online
website sales) with Board’s computerized system for real time reporting of sales. (Sec 3(9A))
 Name, address and CNIC of all those ordinary customers should be required to be kept where
value of sales inclusive of sales tax made to them through online store exceeds Rs. 100,000
and payment is not made through debit/credit card or digital mode.
 As HPL is registered as a manufacturer subject to requirement of Sections 8 and 8B, there is
no additional requirement in respect of claiming input tax and refund of input tax. However,
in respect of retail business, input tax will be reduced by 60% in case HPL fails to integrate
online website sale.
 For supplies of fabric an additional benefit of reduced rate @ 12% (instead of standard 17%)
on supplies will be available if HPL has integrated its retail outlet and have maintained 4%
value addition during last 6 months. (8th Sch S.no 66).
 Normally input adjustment upto 90%of output is allowed to all registered persons. However,
in case of integration, tier-1 retailers can adjust input upto 95% of output.
 Since HPL will be registered, there will not be any withholding tax implications on it.

Answer: 5 (01 Mark for each correct point)

 It will be treated as tax avoidance.
 As per section 109 of the ITO,2001 Commissioner may disregard an entity or a corporate
structure that does not have an economic or commercial substance or was created as part of
tax avoidance scheme.
 Tax avoidance scheme means any transaction where one of the main purpose of a person
entering into the transaction is the avoidance or reduction of any person’s liability to tax
under the Ordinance.
 Since objective of the transaction was to avoid tax, therefore, CIR may initiate proceedings
under section 109.
 Tax Planning & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Answer: 6
Alpha Limited
Computation of sales tax liability
May-22

value of supply Rate Sales tax Marks

Input tax: Rupees in Million

Purchases from registered person 350 17% 59.5 0.25

Purchases from registered person 50
Less laptop batteries and adopters-exempt 6th schedule (30) 0.75
Edible fruits-only local supply is exempt under 6th schedule 20 17% 3.40 0.75
Residual input tax 62.90
Less inadmissible input due to sales to non registered person in excess of (22.20) 4
Rs. 10 million-W-1
40.70
Output tax:
Sales to registered person:
Natural gas of Rs. 20m supplied to chemical plant @ 17% 20 17% 3.40 0.75
Natural gas of Rs. 10m supplied to fertlizer plant @ 5% under 8th 10 5% 0.50 0.75
schedule
Phosphoric acid of Rs.5 million supplied to fertilizer plants in Lahore 5 17% 0.85 0.75
for manufacturing of DAP- not a eight schedule item, subject to 17% tax
Locally manufactured laptop-exempt under 6th schedule 5 exempt - 0.75
Balance sales subject to 17% tax 60 17% 10.20 0.25
100 14.95
Sales to non-registered person:
Sales to distributor-Mr. Hamza-3% payable as bottom line 30 17% 5.10 0.25
Sales to cottage industry-3% not payable as not liable to register 20 17% 3.40 0.25
Sale to federal government-3% further tax not payable 15 17% 2.55 0.25
Sales to wholesaler-3% payable as bottom line 20 17% 3.40 0.25
85 14.45
Computation of sales tax liability
Output tax 29.40
Less input-90% rule not applicable due to listed company 40.70 1
(11.30)
Less residual input on machinery-W-2 2.20 1.5
(13.50)
Add 3% further tax on sale to distributor 30 3% 0.90 0.25
3% further tax on sale to wholesaler 20 3% 0.60 0.25
Sales tax payable with return 1.50 0.5
Sales tax input to be carried forward (13.50) 0.5
Working: 14.00
 Tax Planning & Practices
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Working:
W-1: Total supplies Input allowable input disallowed
Sales to distributor-Mr. Hamza 30 10 20
Sales to cottage industry-sec 73 not applicable as not liable to register 20 20 -
Sale to federal government-sec 73 not applicable 15 15 -
Sales to wholesaler 20 10 10
Total supplies 85 55 30

A registered person can supply upto Rs. 10 million per person per month to non registered person. In case of non-
compliance the supplier shall not be entitled to claim input tax attributable to such excess supplies to unregistered persons.

Residual input tax 62.9

Input to be disallowed (12.75 X 30/85) 22.2
40.7
W-2:
Residual input on machinery 3.4
Input to be disallowed (3.4 X 30/85) 1.2
2.2

Answer # 7
Musharaf Limited (ML)
Computation of net federal excise duty
Tax Period: May 2022

Output tax Value Rate Amount Marks

sale of import of cigarettes- output is payable on accrual basis 48,750,000 65% 31,687,500 1
Sale of locally manufactured cigarettes-retail price is less than 5,960/1000 1.65 per cigarette 6,435,000 1

38,122,500
Input tax
Duty paid on import of cigarettes (Rs.195,000 x 250) 48,750,000 65% 31,687,500 1
Less inadmissible input on 35,000 cigarettes as sales amount not received (5,687,500) 1
26,000,000
Un-manufactured tobacco-3900kg 10/KG 39,000 1
Conversion charges-sales tax input not allowed in FED - 1
26,039,000
Net duty payable 12,083,500 6

(The End)
 The Professionals’ Academy of Commerce
Pakistan’s Leading Accountancy Institute

Certified Finance and Accounting Professional Stage Mock Examinations

26 May, 2022
3 hours – 100 marks
Additional reading time - 15 minutes

Audit, Assurance & Related Services

Q.1 You are manager in Tauseef and Company Chartered Accountant and assigned to the audit of Tech Box
Limited (TBL) which is engaged in design and construction of bespoke machinery used in the oil industry.
The previous audit of TBL was conducted by a different firm. The year end of TBL is 30th September 2021.
TBL was established 15 years ago by Zeeshan Ahmad (CEO), who is engineer and owns 60% of shares, with
the remainder split equally between his brother and sister, Ahsan Ahmad and Ayesha Ahmad. TBL board of
director includes Ahsan as CFO, Ayesha as marketing director and non-family member Abul Samad, who is
director operations. Zeeshan is planning to sell his shares and retire from business. Other two siblings will
retain their shares and board position. Initial discussion with potential acquirer of Zeeshan shares have begun
last year.
TBL owns a head office and leases a production facility where machines are designed and assembled under
contract with individual customers. Typically, an order takes fourteen months to complete, from initial design
to installation at customer premises.
Key information extracted from the management accounts.
Notes Projected to 30th Sept 2021 Actual to 30th Sept 2022
Rs. in million Rs. in million
Revenue 1 75 65
Operating profit 2 18 10
Profit before tax 3 14 9
Total Assets 120 88
Included in total assets:
Intangible assets 4 19 10
Notes:
1. Revenue is derived from the contract involving the design, manufacture and installation of machinery to
customer order. Currently, TBL established that all of its contract contains one performance obligation
which is installation of machinery. However, around the quarter of contract also contain three years
support services for the machinery installed.
2. Operating profit includes a profit of Rs. 2.2 million related to A-Contract. This is the full amount of profit
estimated to be made on this contract. CFO suggests that while the policy is to determine completion stage
by using output method, it is appropriate to record full amount of profit as customer has paid in advance.
Operating profit also includes loss of Rs. 700,000 relating to B-Contract. The loss is determined based on
estimated loss of Rs. 840,000 pro-rata over the number of months completed on the contract by 30th
September 2021.
Contract-A:
It is was entered in October 2020 where it was estimated that design and construction would take 15 months
with installation estimated to take place in January 2022. The agreed price of machine is Rs. 6 million and
TBL will have incurred cost of Rs. 2.6 million in relation to contract by 30 th September 2021. Based on
projected plans, the estimated value of work certified on the same date is Rs. 4 million and estimated cost to
complete is Rs. 1.2 million.
Contract-B:
It was entered on 1st December 2020 which was projected to be completed in 12 months by making profit of
Rs. 2.8 million. However, due to cost inflation and errors made in initial project budget. The contract is
estimated to make a loss of Rs. 840,000.
 Audit, Assurance & Related Services |Page 2 of 4

3. Profit before tax includes estimated increase in the fair value of Defense Trade Center (DTL) investment
property of Rs. 2 million which was purchase on October 2020 for Rs. 15 million. The TBL is going to
appoint an expert to provide valuation of the property.
4. The change in the value of intangible assets represents a transaction which took place in March 2021,
whereby TBL purchased some design from Zeeshan for Rs. 9 million. The value of transition was
determined by Zeeshan and engagement partner has asked for information to support this value but
nothing has yet been received from Zeeshan.
Required:
a. Identify and briefly describe the significant risks to be considered at the planning stage of TBL. (23)
b. Design the principal audit procedures to be performed in respect of DTL. (05)

Q.2 You are the manager responsible for the audit of Strings Limited (SL) for the year ended 30 September 2021.
During a visit to the team performing the fieldwork, the audit senior shows you a cash flow forecast covering
six-month periods to 30 September 2023 as prepared by management as part of their assessment of the going
concern status of the company.
The actual and forecast six-monthly cash flows for SL for the periods ended:
Actual Forecast
31
31 March 30 Sept 31 March 30 Sept March 30 Sept
2021 2021 2022 2022 2023 2023
Rs. in million
Operating cash flows
Receipts from customers 13,935 14,050 14,300 14,700 14,950 15,400
Payments to suppliers (10,725) (10,850) (11,050) (11,400) (11,600) (12,000)
Salaries (1,250) (1,300) (1,275) (1,326) (1,301) (1,353)
Other operating cash
payments (1,875) (1,850) (1,913) (1,887) (1,951) (1,925)
Other cash flows
Sale of investments – – – – – 500
Repayment of Javed Latif – – – – – (500)
Repayment of bank loan – – – – (1,500) –
Receipt of bank loan – – – – 1,500 –
Cash flow for the period 85 50 62 87 98 122
Opening cash (275) (190) (140) (78) 9 107
Closing cash (190) (140) (78) 9 107 229

The following additional information has been provided in support of the forecasts:
i. Receipts from customers and payments to suppliers have been estimated based on detailed sales forecasts
prepared by the sales director.
ii. Salaries and overheads have been estimated as the prior year cost plus general inflation of 2%.
iii. The bank loan expires on 5 January 2023. The finance director expects to take out a matching facility with
the current lender to pay off the existing debt.
iv. On 1 October 2020, the chief executive, Javed Latif, gave the company a three-year, interest free loan
secured by a fixed charge over the operational assets of SL. The audit team was unaware of this loan prior
to obtaining the cash flow forecast.
v. The directors plan to sell some investments in listed shares to fund the repayment of the chief executive’s
loan. On 30 September 2021, the investments were carried in the statement of financial position at their
fair value of Rs. 350 million.
Required:
a. Evaluate the appropriateness of the cash flow forecast prepared by SL and recommend the further audit
procedures which should be performed. (14)
 Audit, Assurance & Related Services |Page 3 of 4

b. Comment on the matters to be considered in respect of the loan from Javed Latif and recommend the
further audit procedures to be performed. (06)

Q.3 During the audit of financial statements two independent clients, for the year ended 30 th June 2021, you have
identified the following matters which will be reported as key audit matters in the audit report:
Pakistan Electric Vehicle Limited (PEVL) (07)
PEVL deals in manufacturing of electric vehicles in Pakistan. Revenue is recognised when PEVL satisfies a
performance obligation by transferring a promised good or service to a customer, and control either transfers
over time or at a point of time. In case of vehicles and spare parts, revenue is recognised when goods are
dispatched and invoiced to the customers. Revenue is measured at the transaction price agreed under the
contract, adjusted for variable consideration such as discount, if any. In most cases, the consideration is
received before the goods are dispatched/invoiced. Deferred payment terms may also be agreed in case of
sales to certain categories of customers. PEVL’s contracts with customers include promises to transfer goods
or services without charges such as free inspections. Such promised goods or services are generally
considered performance obligations and related sales revenue is deferred under IFRS 15, if it is deemed
material. Amount received on account of sale of extended warranty is recognised initially as deferred revenue
and is credited to the statement of profit or loss in the relevant period covered by the warranty.
Azadi March Limited (AML) (07)
AML is a private bank. It maintained certain foreign currency accounts and investments which aggregated to
Rs 324 billion as of June 30, 2021. This includes balances aggregating to Rs 125 billion which were placed
through appointed fund managers under the supervision of the board.
Required:
Draft the key audit matters section to be included in the audit report of respective financial statements. (You
may assume other necessary details where required)

Q.4 You are working as audit senior in the firm of chartered accountants and joined the audit of Silicon Fabrics
(Private) Limited (SFPL) which is close to completion for the year ended 30 th September 2021. The audit
manager has shared following issues with you. Profit before tax for the year is Rs. 495 million.
Long-term loan
Included within SFPL’ bank loans is a loan of Rs. 250 million, of which Rs. 190 million is currently classified
as non-current liabilities. During the year, SFPL defaulted on a payment, which as per the loan agreement,
means the whole loan balance becomes immediately repayable on demand. Audit evidence has been obtained
that confirms the default, the loan agreement terms and correspondence with the bank. Negotiations with the
bank were concluded on 15 November 2021 and the bank agreed not to demand full and immediate repayment
as a result of the breach. As the waiver was agreed before authorising the financial statements, the finance
director has not amended the financial statements and the liability of Rs. 190 million is classified as a non-
current liability. SFPL has not even disclosed the details of the breach in its financial statements. It’s total
non-current liabilities are Rs. 1,036 million.
Bank overdraft
SFPL is reliant on a bank overdraft from another bank that is due for renewal in January 2022.
Correspondence with the bank was reviewed and whilst renewal of the overdraft facility is under discussion,
audit evidence concluded that SFPL is a going concern provided the overdraft facility is renewed. However,
this uncertainty needs to be disclosed.
Fraud
A fraud was discovered in November 2021. A member of staff had been misappropriating raw materials as a
result of lack of controls over goods leaving the building. He had managed to conceal the fraud by falsifying
the inventory count sheets. SFPL has calculated that the amount of inventory at year end is overstated by Rs.
0.5 million but no adjustment has been made to the financial statements. We have sufficient audit evidence to
confirm that the extent of the fraud is not greater than this amount. Total inventory of SFPL is Rs. 75 million.
Inventory valuation
The audit on inventory valuation has identified items in inventory that have not been sold by the date of
testing. These items relate to fashion clothing that SFPL sells to resellers, which had an original cost of Rs. 20
million when it was produced in June 2021. The audit team’s review of sales during the year shows that, on
average, similar fashion items which are held for more than four months, sell for 20% of the original cost. The
sales manager was confident that these items would sell for more than they cost but could not produce any
 Audit, Assurance & Related Services |Page 4 of 4

additional evidence. The directors were not interested in discussing this as they said they left these decisions
to the sales manager who has much greater knowledge of these items and the selling price.
Required:
a. Evaluate the above issues and discuss your course of actions required prior to the signing of the auditor’s
report. (08)
Note: Detailed verification procedures are not required.
b. Evaluate the impact of each issue on auditor’s report by considering them separately. (10)

Q.5 You are partner in Shine and Company Chartered Accountants (SC) and assigned to the audit of Terabyte
Limited (TL). Aryan is the CEO of the TL and also owns 65% shares of the company. A meeting took place
yesterday with directors where they informed you about potential sale of Aryan’s entire shareholding. The
directors further reveals that Gigabyte Limited (GL) is the company with whom negotiation have started in
relation to the sale of Aryan’s shares. GL is an existing audit client of your firm (SC). The directors have
requested that SC assist them with sale by performing a vendor due diligence service, in which they would
conduct an independent review of TL’s financial position and future prospects and produce a report on their
findings to be provided GL.
Required:
Discuss the categories of threats involved in the above situation and advise the possible course of action that
may be followed. (09)

Q.6 You are working as audit manager of a firm of chartered accountants and currently deputed to the audit of Big
Buttons Limited (BBL) for the year ended 31st October 2021. Your team has brough following matters for
your guidance.
Rental
In January 2021, the board discussed a proposal that two floors of one of BBL's owned office buildings should
be leased out, as these floors are only occasionally used for meetings. Discussions focused on whether this
would impact on the company's ongoing activities and, in particular, whether the tenants would be able to gain
access to BBL's offices. Osman, on of the director, explained that he had discussed this with BBL's property
teams and they had told him that the two floors have their own separate access so this will not be an issue. The
board approved the rental and Omar was instructed to inform the relevant teams to proceed further. Two floors
of the building were rented out to a third party and lease commenced on 1 May 2021 and was for a period of 2
years.
Purchase of new plant
In April 2021 Asma, one of the directors, explained that BBL needed some new equipment for some of its
supermarkets and, after detailed research, she believed the best equipment could be acquired from Europe. She
outlined that they could take out an option to acquire the equipment for delivery in December 2021 for a cost
of €6 million. Asma suggested that she should investigate ways of reducing the foreign currency risk for this
contract. On 1 June 2021 BBL signed an option agreement to buy an item of plant for €6 million with the new
plant being delivered in December 2021. The board has agreed this future purchase and the plant is required,
so BBL is highly confident that the option will be exercised.
Required:
Evaluate the above matters and suggest key audit procedures that should be performed. (11)

(The End)
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Answer: 1
(a) New audit client (02)
This is the first year audit which increases detection risk as our firm does not have experience with
the client, making it more difficult to detect material misstatements. However, this risk can be
mitigated through rigorous audit planning, including obtaining a thorough understanding of the
business of the company.
Management bias (03)
The company’s major shareholder, Zeeshan Ahmad, is planning to sell his shares in the company
and initial discussions have already taken place with a potential purchaser. This situation means that
there is a risk of management bias in that Zeeshan will want to maximise the sale price and for this
reason there is a risk that assets will be overstated and revenue and profitability maximised, as he
will want the company’s financial statements to reflect as good a financial position and
performance as possible.
Given the owner-managed status of the company, it could be easy for Zeeshan to override controls
relating to financial reporting, and/or to put pressure on the chief finance officer (CFO), who is his
brother, to manipulate the financial statements. Several of the risks discussed below indicate that
management bias could have been applied in a number of accounting treatments, in particular the
valuation of investment property and recognition and measurement of intangible assets.
Analytical procedures – overstatement of revenue/profit (03)
Analytical procedures of the financial information provided shows that:
 Revenue is projected to increase by 15·4%
 Operating profit is projected to increase by 80%
 Profit before tax is projected to increase by 55·6%
While there may be relevant and appropriate explanations for these trends, the auditor should be
alert to the possibility that revenue and profit could be deliberately overstated. The trend in
operating profit is particularly concerning, and management will need to provide explanations and
corroboratory evidence in support of these projections. Zeeshan Ahmad has incentive for the
financial statements to show growth in revenue and profit given the potential sale of his shares, so
there is a risk of aggressive earnings management.
Recognition of revenue – support service (02)
The company sells around one quarter of its machines under a contract which includes a support
service, but all contracts are currently being established with only one performance obligation.
There is a risk that the revenue related to these contracts is not being separated into component
parts as required by IFRS 15.
Recognition of revenue/profit – Contract-A (02)
The CFO’s suggestion that the full amount of profit can be recognised this year in respect of this
contract is incorrect.
Based on the company’s stated accounting policy, which is to use the output method, the stage of
completion should be based on work certified, which is projected to be Rs. 4 million compared with
the contract price of Rs. 6 million, giving a percentage completion of 66·7%. The company should
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therefore recognise 66·7% of the estimated Rs. 2·2 million profit on the contract, which is Rs. 1·47
million. Profit is therefore overstated by Rs. 730,000.
This is material, at 5·2% of profit before tax. The accounting treatment could be an indication of
management bias, and the desire of Zeeshan Ahmad to overstate profit for the year.
Contact-B – onerous contract (03)
The projected profit to 30 September 20X5 includes a loss relating to this contract. It is correct that
losses should be recognised, however, the method applied of recognising the loss over time is not
appropriate.
The total loss on the contract, estimated at Rs. 840,000, is material as it represents 6% of profit
before tax.
Where contracts are expected to be loss-making, they should be accounted for as onerous contracts
in accordance with IAS 37, which requires a provision to be recognised for an onerous contract.
From the information provided, it is not possible to determine the exact amount which should be
provided, but recognising the loss over time is not an appropriate method of accounting and it is
likely that the loss recognised and provision in the statement of financial position are understated.
This could be a signal of management bias – the accounting treatment applied reduces the loss
recognised within profit for the year and could be an indication of earnings management applied in
the preparation of the financial statements.
There is also a risk that the ‘cost inflation’ and budgeting errors which have allegedly caused the
contract to become loss-making would also have implications for other contracts which the
company is working on. This may mean that further onerous contracts exist, and more losses need
to be recognised, providing further risk that profit for the year is overstated.
Investment property (03)
The Rs. 15 million invested in the DTL is material, representing 12·5% of total assets. The change
in fair value which is recognised within profit is also material at 14·3% of profit before tax.
An audit risk arises from the size of the fair value gain which has been recognised. The property
was only purchased at the start of financial year, and an increase in fair value of 13·3% in a 12-
month period is significant. The valuation of the property by the expert has yet to be performed, so
the fair value currently included in the financial statements could be an attempt by management to
boost profit for the year, for the reasons discussed above. The level of subjectivity which may be
involved in determining the fair value increases the risk of material misstatement. Risk is
heightened as TBL may hire an expert who is known to them in order to achieve a higher fair value
which will manipulate the profits for the year and therefore the objectivity of the expert used is also
a risk.
Intangible asset (03)
The intangible asset recognised in the year at cost to the company of Rs. 9 million is material to the
statement of financial position as it represents 7·5% of total assets. It is also material by nature as it
is a transaction between the company and the majority shareholder and chief executive officer,
making it a related party transaction, which will be discussed in more detail below.
There is a risk of management bias relating to this transaction. Given that Zeeshan is planning to
sell his shares, there is a significant risk that the transaction is an attempt to window-dress the
financial statements in order to maximise the asset value, influence the business valuation and
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ultimately increase the amount which Zeeshan receives on selling his shares. Zeeshan may also
have engineered the transaction as a way to remove funds from the company without having to pay
a dividend.
There is also a risk that the Rs. 10 million opening balance of intangible assets is overstated,
especially given that this is a new audit client. Zeeshan may have set up similar transactions in the
past, resulting in the recognition of intangible assets which may not be appropriate.
Related party transaction (02)
There is a risk that disclosure of the transaction is not made in accordance with IAS 24 which
requires that if there have been transactions between related parties, there should be disclosure
regarding the nature of the related party relationship as well as information about the transactions
and outstanding balances where necessary.
(b) (5 Marks in total, 0.5 mark against in each point)
Audit procedures in respect of the DTL
i. Review board minutes for details of the reason for the purchase, to understand the business
rationale, and confirm board approval of the transaction.
ii. Agree the Rs. 15 million paid to the company’s cash book and bank statements.
iii. Agree the carrying amount of the property to TBL’s non-current asset register to confirm the
initial value of the property has been recorded appropriately.
iv. Obtain proof of ownership, e.g. title deeds, legal documentation to confirm that the company
owns the building.
v. Visit the building to obtain evidence of existence and occupancy of the building by retail
establishments to confirm that the property has been appropriately classified as an investment
property.
vi. Obtain and inspect rental agreements for the retailers who occupy the DTL, to confirm that
the property is not owner-occupied and that it generates a rental income to verify
classification.
vii. Enquire as to whether the company holds any other investment property, and if so, confirm it
is also held at fair value to confirm that the accounting treatment is consistent for all
investment property.
viii. Discuss with management the rationale for the accounting policy choice to measure the
property at fair value and confirm that the notes to the financial statements state that this is the
company’s accounting policy.
ix. With regard to the expert appointed by management to provide the valuation for the building:
a. Obtain information to confirm the experience and qualifications held by the expert, e.g.
certificate of registration with a recognised professional body.
b. Obtain confirmation of the expert’s independence from TBL and its management team.
c. Review the instructions provided to the expert by management and agree that the
valuation method is in accordance with IFRS requirements and can be relied upon as
appropriate audit evidence.
d. Obtain the final report issued by the expert and assess that the assumptions and methods
used and conclusions reached by the expert are in line with the auditor’s understanding
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of the business, confirm that the expert’s valuation has been used as the valuation
recognised in the financial statements, and investigate any discrepancies.
e. Confirm that the valuation has been carried out at the reporting date and in accordance
with the company’s accounting policy.
f. If the valuation is at a different date to the reporting date, assess the reasonableness of
the valuation reflected in the financial statements.
g. Re-perform any calculations contained in the expert’s working papers.
Answer: 2
(a) There are a number of issues relating to the forecast which raise concerns about the assessment of
SL’s going concern status and therefore warrant further investigation.
Receipts from customers (1.5)
There was little growth in cash receipts in the second half of the year ended 30 September 2021
(0·8%), yet in each consequent six-month period management predicts a significant rise in receipts
of between 1·7% and 3·0%. This could be based on overly optimistic forecasts in relation to sales
growth for the same period. If sales forecasts are too optimistic, this could eliminate the forecast
small positive cash flows, which could leave the company in a net overdraft position for the entire
two-year period. The movement in relation to customer receipts is a key assumption underpinning
the return to a positive cash position and needs to be scrutinised further.
Salaries and other payments (1.5)
While annual receipts from customers and payments to suppliers are forecast to rise during the
forecast period by 8·5% and 9·4%, respectively, the amounts attributable to salaries and other
operating payments are only forecast to rise by 4·1%. This is based on management’s simple
assumption of a general 2% annual inflation in these costs. This seems to be overly simplistic and
will require further investigation. Salary costs could be forecast using a more sophisticated
methodology based on required employee numbers and average wages/salaries.
The significant forecast increase in sales suggests that operating activities will increase over the
next two years and it might be expected that staff requirements may increase in line with this. For
similar reasons, it is likely that a larger increase in other operating costs would be required to match
the increased administrative burden of producing and selling more goods and/or services.
Sale of investments (1.5)
Management is planning to sell some investments in listed shareholdings for Rs. 500 million to
repay a loan to the chief executive. At 30 September 2021, however, the fair value of the
investments was only Rs. 350 million. As the fair value of these investments is revalued at the end
of each year based upon the current share price, this is assumed to reflect the amount at which the
shares were trading at the end of September. Management is therefore expecting the shares to
increase in value by Rs. 150 million in the space of two years, which represents a 43% rise. This is
an extremely optimistic assumption in comparison to average rates of growth across most stock
markets.
It therefore appears likely that there will be a shortfall in the amount raised to repay Javed Latif. SL
will therefore have to supplement the amount received from selling investments with cash from
other sources, which will lead to a reduction in the cash position in comparison to the forecasts.
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Repayment of the bank loan (1.5)
The bank loan is due for repayment 15 months after the year end. Management is assuming that
they will be able to fund the repayment with a new loan facility from the same finance provider.
Without any agreement in place from the provider, this represents a significant assumption.
Without a new facility SL will have no means with which to repay their obligation, which could
lead to the lender taking action to recover the loan amount. This could include seizing assets which
were provided as security over the loan or commencing insolvency proceedings. In either case, this
could have a significant impact on SL’s ability to trade into the foreseeable future and, therefore,
the loan repayment event represents a material uncertainty which may need to be fully disclosed in
the financial statements of SL in accordance with IAS 1.
Missing cash flows (1.5)
There seems to be a lack of consideration of a number of non-operating cash flows which one might
expect to see in a two-year forecast. For example, most companies maintain a practice of regular
replacement of old, inefficient tangible non-current assets as opposed to making larger, less regular
replacements which may create a significant drain on cash resources in one particular year. The
forecast currently has no allocation for capital investment. In a similar fashion, there are no cash
flows related to tax and dividend payments. It is possible that such transactions have been
overlooked in the preparation of the forecast.
Further audit procedures (7.5 Marks in total, 0.75 mark against in each point)
i. Obtain a copy of the latest interim financial statements and compare the actual post year-end
sales performance with the forecast sales upon which the cash flow forecast is based.
ii. Discuss with management the rationale for the expected increase in customer receipts and
where possible confirm this to customer correspondence, orders or contracts.
iii. Inspect the documentation detailing the terms of the loan with Javed Latif to confirm the
amount outstanding and the agreed date of repayment.
iv. Inspect the terms of the bank loan to confirm the final amount due for repayment, the date of
repayment and whether any assets have been accepted as security for the loan.
v. Enquire of management whether they have entered into any negotiations with their bank, or
any other financial institution, to provide a replacement loan in January 2023. If so, request
corroborating evidence such as signed agreements, agreements in principle or correspondence
with the financial institutions.
vi. Enquire of management whether they have any contingency plans in place to repay both loans
on time should they not be able to raise the required amount through selling investments and
obtaining new loan agreements.
vii. Perform an analytical review of actual monthly payroll costs incurred obtained from the
payroll department. Include any available payment periods after 30 September 2021 to help
ascertain whether management’s assumptions regarding salaries are appropriate. Seek
corroborating evidence for any fluctuations in cost such as HR records confirming pay awards
and changes in staff.
viii. Perform an analytical review of actual other operational costs and consider the level of other
costs as a percentage of sales. Compare this to the levels included in the forecast. Investigate
any significant differences.
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ix. Corroborate the lack of investment in new tangible non-current assets by performing an
analytical review of the levels of additions and disposals over the last, say, five years to see if
this supports the absence of any allocation for this in the short-term future and consider this in
light of our understanding of the entity and its production process.
x. Compare the cash flow forecasts to any capital expenditure forecasts prepared by SL to ensure
that the cash flow forecast is consistent with this. Ask management to explain any differences
identified.
xi. Review the non-current asset register and identify any assets with a zero or negligible
carrying value which could indicate that the assets have fulfilled their useful lives and are due
for replacement.
xii. Inspect the cash book post year end to see if there are any significant cash transactions which
do not appear to have been included in the forecasts, in particular cash transactions relating to
purchases or disposals of assets and dividend payments.
xiii. Review the outcome of previous forecasts prepared by management to assess how effective
management has been in the past at preparing accurate forecasts.
xiv. Obtain written representations from management confirming that they have no intention to
either purchase or dispose of non-current assets or to pay dividends over the next two years.
(b)
Related party transaction (1.5)
As a key member of staff at SL, the loan from the chief executive represents a related party
transaction. As such, the transaction and related outstanding balances must be fully disclosed in the
financial statements in accordance with IAS 24. This means that the nature of the related party
relationship, the nature and the amount of the loan, the amounts outstanding at the year end and the
terms and conditions of the loan, including a description of the fixed charge, must be disclosed in
the notes to the financial statements.
Interest free loan measurement (1.5)
The loan was received during the current year ended 30 September 2021. The loan liability should
have been initially recorded at its fair value, which would normally be the transaction price of Rs.
500 million. While it will be difficult to identify a similar instrument due to the nature of the
relationship between the lender and the company, a similar instrument should be identified based
upon the currency used, the loan term and any other similar factors, for example, a three-year, Rs.
loan from a bank. At the year end, the outstanding loan liability should have been measured using
the amortised cost method and the effective interest calculated should be recognised as a finance
charge in the statement of profit or loss.
Further audit procedures (3 Marks in total, 0.75 mark against in each point)
i. Inspect the loan agreement to confirm the amounts loaned to the company, and the other
relevant terms including the rate of interest, the repayment date and the associated penalties
for late payment.
ii. Inspect the related party disclosures in the financial statements to ensure that they provide
sufficient information and accurately reflect the terms and amounts relating to the transaction.
iii. Additional procedures will need to be performed regarding the completeness of related party
transactions as the loan with Javed Latif was not identified through normal audit procedures.
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iv. The market rate used in the calculation of the fair value of the loan should be compared to a
range of suitable instruments, e.g. three-year bank loans, to ascertain its appropriateness.
Following this, the calculation should be checked for arithmetical accuracy.
v. The amount recorded for the initial loan value and the year-end value should be recalculated
using the appropriate discount factor and market rate to confirm the arithmetical accuracy of
management’s calculations.
vi. Review the loan liability recognised in the financial statements to ensure that the appropriate,
discounted figure has been used.
vii. Reconcile the effective interest rate for 2021 from the amortised cost calculation to the
finance charges in the statement of profit or loss to confirm that this is appropriately included
in profits.

Answer: 3
Pakistan Electric Vehicle Limited (PEVL)
Key audit matter How the matter was addressed in our audit
Revenue recognition (2.5) Our audit procedures in relation to the matter,
(Refer notes X to the annexed financial amongst others, included the following: (4.5
statements) Marks in total, 0.5 mark against each point)
Revenue is recognized when control of the i. Assessed the design, implementation and
underlying products has been transferred to the operating effectiveness of the relevant key
customers. PEVL is engaged in the assembling internal controls over PEVL’s system
and progressive manufacturing and sale of electric which governs revenue recognition
vehicles and spare parts. PEVL recognized ii. Understood and evaluated the accounting
revenue from the sales of own manufactured policies with respect to revenue
goods measured net of discounts and recognition including those related to
commissions. discounts and commissions and its
We consider revenue recognition as a key audit compliance with IFRS 15
matter due to revenue being one of the key iii. Performed testing of sample of revenue
performance indicators of PEVL, large number of transactions with underlying
revenue transactions with a large number of documentation including dispatch
customers, inherent risk of material misstatement documents and sales invoices
and significant increase in revenue from last year iv. Tested on a sample basis, specific revenue
despite the lockdown due to COVID-19 during transactions recorded before and after the
the year. reporting date with underlying
documentation to assess whether revenue
has been recognized in the correct period
v. Checked on a sample basis, approval of
sales prices and commissions by the
appropriate authority
vi. Performed recalculation of discounts and
commission as per Company’s policy on
test basis
vii. Performed audit procedures to analyze
variation in the price and quantity sold
during the year; and
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viii. Assessed the adequacy of disclosures
made in the financial statements related to
revenue.

Azadi March Limited (AML)

Key audit matter How the matter was addressed in our audit
Foreign currency accounts and investments Our audit procedures, among others, included the
(02) following: (5 Marks in total, 1 mark against
each point)
(Refer note x of the annexed unconsolidated
financial statements) i. We obtained understanding of the
AML maintained certain foreign currency processes, assessed the design and
accounts and investments which aggregated to Rs implementation and tested operating
324 billion as at June 30, 2021. This includes effectiveness of key controls throughout
balances aggregating to Rs 125 billion which were the year over recognition, derecognition
placed through appointed fund managers under and valuation of investments and related
the supervision of board. revenue
The existence and valuation of these were ii. Sent direct confirmations to
assessed by us as a significant risk area and counterparties to confirm the balances of
therefore we considered this as a key audit matter investment holdings and
iii. We compared the prices to independent
sources where quoted market prices were
used.
Further, in respect of the investment made
through fund managers:
iv. We obtained Type-2 report from Fund
Managers to assess that controls were
suitably designed and operated effectively
in respect of its activities
v. We obtained the monthly statement of
changes in net assets provided by the fund
managers used by management for
recognising income in respect of foreign
currency securities and reconciled them
with the accounting records of AML to
assess that they are accurately recorded.
vi. We performed substantive audit
procedures on year-end balance of
portfolio including evaluation of fund
managers statements, and reperformance
of valuations on the basis of observable
data at the year end.
We also evaluated the adequacy of the overall
disclosures in the financial statements in
respect of the investment portfolio in
accordance with the requirements of
applicable financial reporting framework.
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Answer: 4
Long-term loan (2.5)
The breach of the loan during the year means that Rs. 190 million classified as a non-current
liability must be reclassified as current liability. IAS 1 requires this classification, as the waiver was
not obtained by the period end but after it.
The lack of disclosure of the breach is in conflict with IFRS 7 which requires the details of any
defaults during the period to be disclosed and the carrying amount of the loan payable in default at
the year-end. These disclosures are required as the waiver was not obtained by the year end.
The obtaining of the waiver is a non-adjusting event, and as it appears to be material, the details of
the waiver must be disclosed.
Actions
 Explain the requirements of IAS 1 to the directors to adjust the financial statements so that the
entire loan is classified as a current liability.
 Discuss the disclosure requirements of IFRS 7 with the directors and request that they disclose
details of the breach in the notes of the financial statements and in the directors’ report.
 Explain to them that whilst the loan must be classified as a current liability, obtaining the
waiver should be disclosed as a material non-adjusting event.
Going concern / Bank Overdraft (1.5)
The lack of renewal of the overdraft facility raises material uncertainties over going concern and
these should be adequately disclosed in the financial statements to ensure that the users understand
the details of the uncertainties. IAS 1 states that these disclosures are required when there are
material uncertainties over going concern, but it does not prescribe the exact information that
should be disclosed.
Actions
 Discuss the lack of disclosure with the directors and agree the details that they should disclose.
Fraud (1.5)
The discovery of the fraud after the year is an adjusting event, as this provides evidence of
conditions that existed at the year end.
Actions
 As the amount is trivial, the auditors should only inform the directors about fraud so they can
decide whether to adjust the financial statements or not.
Inventory valuation (2.5)
The key issue here is the lack of audit evidence over the NRV of these inventory items because
these items have not been sold in the post year end period, nor are there any orders for the items.
As SFPL is in the process of negotiating the renewal of the bank overdraft, audit risk is higher in
respect of any potential adjustment.
The audit team has assessed that inventory held for more than four months only sells for 20% of
cost. This would result in a decrease in inventory value by Rs. 16 million (20x80%), however this is
disputed by the sales manager, meaning that quantifying any potential adjustment is not possible.
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Actions
 Discuss the issue with management so that they understand that evidence over this area is
required and that they need to provide the required information to allow us to perform our
duties as auditors.
 Review sales/orders of these goods up to the current date to establish if additional evidence is
available over the NRV.
(b)
Long-term loan: (03)
If the directors do not reclassify the loan and provide the required disclosures, the audit team must
assess whether the issue is material and/or pervasive to the financial statements as a whole. The
most concerning area to the auditors would be the misclassification of the loan as a non-current
liability, which represents a material misstatement, as the amount of Rs. 190 million represents 18%
(190/1,036) of noncurrent liabilities, which is material.
Not reclassifying would represent a disagreement over the treatment of the loan and the audit
opinion should be modified. The basis of opinion paragraph will quantify and explain the material
misstatement and will include the details of the waiver which has been obtained after the year end.
The audit opinion will be qualified ‘except for’ since issue is material but not pervasive.
If the directors do not provide the disclosures of the breach as requited by IFRS 7, then this would
be a material misstatement and the opinion would be qualified except for.
Overdraft (03)
If the directors incorporate the required disclosures and the auditors agree that the disclosures are
appropriate, then the audit opinion will be unmodified. The audit report should be amended by the
inclusion of a paragraph titled 'Material Uncertainty Related to Going Concern'. This paragraph
draws the user's attention to the disclosures in the financial statements and the key factors relating
to the uncertainty, but makes it clear the opinion is not modified in this area.
If the directors make the required disclosures and the auditors do not agree that the disclosures are
appropriate, then there is still a material misstatement and the audit opinion should be qualified for
the lack of disclosure.
If the directors do not make the required disclosures, there is a material misstatement as a result of
the lack of disclosure. The audit opinion should be qualified except for and the basis of opinion
paragraph will provide the details of the uncertainties that have not been disclosed.
Fraud (1.5)
The adjustment represents 0.1% (0.5/495) of profit before tax and 0.6% (0.5/75) of inventory and
is clearly immaterial. If the directors decide not to adjust the financial statements, this will have no
impact on the audit report. However, this needs to be added to a list of potential adjustments
considered in the light of all adjustments.
Inventory valuation (2.5)
If no additional audit evidence is obtained over the NRV of the inventory, the lack of evidence over
a material balance means that the audit opinion will be qualified except for. This is because it is
material but not pervasive, as the impact is confined to inventories only.
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Alternatively, if audit evidence is obtained regarding the NRV, the auditors will need to carefully
consider whether this supports the valuation of inventory in the financial statements or if any
adjustments are required. Then, a judgement will need to be made on whether the auditors agree
with the valuation to give an unmodified audit opinion. If the auditors disagree with the valuation
and consider the amount to be material, then the opinion will be qualified except for. A basis of
opinion paragraph will be added to explain and quantify the adjustment.
Answer: 5
Conflict of Interest (03)
The request for SC to perform a vendor due diligence service creates a conflict of interest. A
conflict of interest arises when an audit firm provides a service in relation to two or more clients
whose interests in respect of the matter are in conflict.
Conflict of interest is related to objectivity which is not to compromise professional judgement
because of bias, conflict of interest or the undue influence of others.
In this case, the interests of TL and GL will be conflicting, GL will want to purchase the shares for
the lowest possible amount and Aryan will want to sell them for the highest possible amount. This
creates, therefore, a significant threat to the objectivity of SC, who may be seen to be acting in the
interest of one party at the expense of the other.
The problem is exacerbated by the nature of the engagement. The audit firm may be privy to
confidential information gained during their time as auditor of TL. If the audit firm were to divulge
this to GL, it would give them a potentially unfair advantage over the other client and would be a
breach of confidentiality.
In all cases of conflict of interest, the audit firm should make full disclosure to both parties and ask
them both to confirm that they give permission in writing for the service to be provided. It is likely
that one of the parties will refuse permission, in which case the service should not be provided.
If consent by both parties were to be provided, SC could safeguard the threats created by the
situation by:

 having separate engagement teams who are provided with clear policies and procedures on
maintaining confidentiality
 having an appropriate reviewer who is not involved in providing either service to the two
clients, to review the work performed to assess whether key judgements and conclusions are
appropriate
 using confidentiality agreements signed by the relevant personnel
 establishing separation of confidential information physically and electronically.
Advocacy Threat (1.5)
The Code states that providing a valuation service can give rise to an advocacy threat, which means
that SC would be promoting the interests of their client in relation to the sales price, thus impacting
objectivity.
Safeguards such as the following could reduce the threat to an acceptable level:
 Use of separate teams to perform the valuation service and the audit of TL, and
 Having an independent second partner review the audit of TL.
 Audit, Assurance & Related Services
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
Management Responsibility (1.5)
There is also a risk that performing such a service would result in the firm assuming a management
responsibility because if the audit firm performs the valuation service, they could be perceived to be
performing a role of management, therefore not appearing to be objective from the audit client.
Assuming a management responsibility for an audit client is prohibited in the Code.
Self-Review Threat (03)
If SC were to value the shares, there is also a threat in relation to subsequent audits of GL and the
new group which will be formed, as in performing the valuation of Aryan’s shares, they would
subsequently be auditing their own valuation work when they audit the new Group’s consolidated
financial statements. The self-review threat leads to an objectivity threat as the audit team may lack
professional scepticism in their audit of the investment in GL’s financial statements, and over-rely
on the valuation performed by colleagues from SC.
The self-review threat can be reduced to an acceptable level by the use of appropriate safeguards
including:
 Use of separate teams to perform the valuation service and the audit of GL, and
 Having an independent second partner review the audit of GL.
The Code suggests that if the valuation would involve both a significant degree of subjective
judgement and have a material effect on the financial statements, then it is likely the valuation
service should not be performed. SC should therefore carefully consider whether it is appropriate to
perform the service, evaluating the potential materiality of the shares and the level of subjective
judgement involved.
Answer: 6
Rental (Total 5 Marks, 1 mark for evaluation and 4 marks for audit procedures)
The main issue in this scenario is reclassification and determination if the two floors could be sold
separately or leased out under a finance lease. The reference in the board minutes to separate
entrances would suggest this could be the case but further confirmation is required.
Audit procedures
i. Establish the carrying value of the property to establish if two floors of the property would be
a material amount.
ii. Discuss the change in use with the directors to establish if the two floors are capable of being
leased or sold separately.
iii. Obtain evidence to support the directors views.
iv. If reclassification is required establish the date of reclassification and ensure that the proper
accounting in respect of reclassification has been applied.
v. Recalculate the rental figures to confirm they are correct and agreed amount to the lease
agreement.
Purchase of new plant: (Total 6 Marks, 1 mark for evaluation and 5 marks for audit
procedures)
The most significant audit issue is whether the criteria for hedge accounting are met because, if they
are not met, then the gain of would need to be accounted for as a derivative, resulting in the gain
being recognised in profit or loss. Another issue is the confirmation that the purchase of the plant
 Audit, Assurance & Related Services
Suggested Answers
Certified Finance and Accounting Professional Stage – Mock Summer 2022
will take place because, in order to be able to hedge account, the transaction must be highly
probable.
Audit procedures
i. Examine documentation to gain evidence that the purchase of the plant is highly probable.
ii. Review the hedge documentation for evidence that it:
a. Describes the hedge relationship
b. Has a risk management objective
c. Identifies the hedging instrument and hedged item
d. Describes the nature of the risk being hedged
e. Hedging relationship consists only of eligible hedging instrument and eligible hedge
items.
iii. Review the hedging relationship to confirm:
a. The economic relationship
b. Effect of credit does not dominate the change in values
c. The quantity of the hedged item and the quantity of the hedging instrument are the
same
iv. Review the board minutes to establish the date the hedging documentation was approved by
the board.
Assess the creditworthiness of the counterparty.

(The End)